<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON NOVEMBER 4, 1998
REGISTRATION NO. 333-
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------------
FORM N-14
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933 [X]
---------------------
PRE-EFFECTIVE AMENDMENT NO. [ ]
POST-EFFECTIVE AMENDMENT NO. [ ]
---------------------
MORGAN STANLEY DEAN WITTER
AMERICAN VALUE FUND
(Exact Name of Registrant as Specified in Charter)
(formerly named Dean Witter American Value Fund)
TWO WORLD TRADE CENTER, NEW YORK, NEW YORK 10048
(Address of Principal Executive Offices)
212-392-1600
(Registrant's Telephone Number)
BARRY FINK, ESQ.
Two World Trade Center
New York, New York 10048
(Name and Address of Agent for Service)
---------------------
COPY TO:
STUART M. STRAUSS, ESQ.
Gordon Altman Butowsky Weitzen Shalov & Wein
114 West 47th Street
New York, New York 10036
---------------------
It is proposed that this filing will become effective on the thirtieth day
after the date of filing, pursuant to Rule 488.
The Exhibit Index is located on page [ ]
PURSUANT TO RULE 429, THIS REGISTRATION STATEMENT RELATES TO SHARES
PREVIOUSLY REGISTERED BY THE REGISTRANT ON FORM N-1A (REGISTRATION NOS.
2-66269; 811-2978).
- -------------------------------------------------------------------------------
<PAGE>
FORM N-14
MORGAN STANLEY DEAN WITTER AMERICAN VALUE FUND
CROSS REFERENCE SHEET
PURSUANT TO RULE 481(A) UNDER THE SECURITIES ACT OF 1933
<TABLE>
<CAPTION>
PART A OF FORM N-14 ITEM NO. PROXY STATEMENT AND PROSPECTUS HEADING
- ------------------------------ -------------------------------------------------------
<S> <C>
1 (a) ........................ Cross Reference Sheet
(b) ........................ Front Cover Page
(c) ........................ *
2 (a) ........................ *
(b) ........................ Table of Contents
3 (a) ........................ Fee Table
(b) ........................ Synopsis
(c) ........................ Principal Risk Factors
4 (a) ........................ The Reorganization
(b) ........................ The Reorganization -- Capitalization Table (Unaudited)
5 (a) ........................ Registrant's Prospectus
(b) ........................ *
(c) ........................ *
(d) ........................ *
(e) ........................ Available Information
(f) ........................ Available Information
6 (a) ........................ Prospectus of Morgan Stanley Dean Witter Capital
Appreciation Fund
(b) ........................ Available Information
(c) ........................ *
(d) ........................ *
7 (a) ........................ Introduction -- Proxies
(b) ........................ *
(c) ........................ Introduction; The Reorganization -- Appraisal Rights
8 (a) ........................ The Reorganization
(b) ........................ *
9 .......................... *
</TABLE>
<TABLE>
<CAPTION>
PART B OF FORM N-14 ITEM NO. STATEMENT OF ADDITIONAL INFORMATION HEADING
- ------------------------------ --------------------------------------------------------
<S> <C>
10(a) ........................ Cover Page
(b) ........................ *
11 .......................... Table of Contents
12(a) ........................ Additional Information about Morgan Stanley Dean Witter
American Value Fund
(b) ........................ *
(c) ........................ *
13(a) ........................ Additional Information about Morgan Stanley Dean Witter
Capital Appreciation Fund
(b) ........................ *
(c) ........................ *
14 ........................ Registrant's Annual Report for the fiscal year ended
December 31, 1997 and Registrant's Semi-Annual Report
for the six month period ended June 30, 1998; Morgan
Stanley Dean Witter Capital Appreciation Fund's Annual
Report for the fiscal year ended November 30, 1997 and
Semi-Annual Report for the six month period ended
May 31, 1998.
</TABLE>
<TABLE>
<CAPTION>
PART C OF FORM N-14 ITEM NO. OTHER INFORMATION HEADING
- ------------------------------ --------------------------
<S> <C>
15 .......................... Indemnification
16 .......................... Exhibits
17 .......................... Undertakings
</TABLE>
- ----------
* Not Applicable or negative answer
<PAGE>
TABLE OF CONTENTS
PROXY STATEMENT AND PROSPECTUS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
INTRODUCTION ............................................................................. 1
General ................................................................................ 1
Record Date; Share Information ......................................................... 1
Proxies ................................................................................ 2
Expenses of Solicitation ............................................................... 2
Vote Required .......................................................................... 3
SYNOPSIS ................................................................................. 3
The Reorganization ..................................................................... 3
Fee Table .............................................................................. 4
Tax Consequences of the Reorganization ................................................. 8
Comparison of Capital Appreciation and American Value .................................. 8
PRINCIPAL RISK FACTORS ................................................................... 11
THE REORGANIZATION ....................................................................... 12
The Proposal ........................................................................... 12
The Board's Consideration .............................................................. 12
The Reorganization Agreement ........................................................... 13
Tax Aspects of the Reorganization ...................................................... 15
Description of Shares .................................................................. 16
Capitalization Table (unaudited) ....................................................... 17
Appraisal Rights ....................................................................... 17
COMPARISON OF INVESTMENT OBJECTIVES, POLICIES AND RESTRICTIONS ........................... 17
Investment Objectives and Policies ..................................................... 17
Investment Restrictions ................................................................ 19
ADDITIONAL INFORMATION ABOUT CAPITAL APPRECIATION AND AMERICAN
VALUE ................................................................................... 20
General ................................................................................ 20
Financial Information .................................................................. 20
Management ............................................................................. 20
Description of Securities and Shareholder Inquiries .................................... 20
Dividends, Distributions and Taxes ..................................................... 20
Purchases, Repurchases and Redemptions ................................................. 21
MANAGEMENT'S DISCUSSION OF FUND PERFORMANCE .............................................. 21
FINANCIAL STATEMENTS AND EXPERTS ......................................................... 21
LEGAL MATTERS ............................................................................ 21
AVAILABLE INFORMATION .................................................................... 21
OTHER BUSINESS ........................................................................... 22
Exhibit A - Agreement and Plan of Reorganization, dated October 28, 1998, by and between
Capital Appreciation and American Value ................................................. A-1
Exhibit B - Prospectus of American Value dated May 1, 1998, As Revised August 21, 1998 ... B-1
</TABLE>
<PAGE>
MORGAN STANLEY DEAN WITTER CAPITAL APPRECIATION FUND
TWO WORLD TRADE CENTER
NEW YORK, NEW YORK 10048
(212) 392-2550
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
TO BE HELD FEBRUARY 24, 1999
TO THE SHAREHOLDERS OF MORGAN STANLEY DEAN WITTER CAPITAL APPRECIATION FUND:
Notice is hereby given of a Special Meeting of the Shareholders of Morgan
Stanley Dean Witter Capital Appreciation Fund ("Capital Appreciation") to be
held in Conference Room A, Forty-Fourth Floor, Two World Trade Center, New
York, New York 10048, at 10:00 A.M., New York time, on February 24, 1999, and
any adjournments thereof (the "Meeting"), for the following purposes:
1. To consider and vote upon an Agreement and Plan of Reorganization, dated
October 28, 1998 (the "Reorganization Agreement"), between Capital
Appreciation and Morgan Stanley Dean Witter American Value Fund ("American
Value"), pursuant to which substantially all of the assets of Capital
Appreciation would be combined with those of American Value and
shareholders of Capital Appreciation would become shareholders of American
Value receiving shares of American Value with a value equal to the value
of their holdings in Capital Appreciation (the "Reorganization"); and
2. To act upon such other matters as may properly come before the Meeting.
The Reorganization is more fully described in the accompanying Proxy
Statement and Prospectus and a copy of the Reorganization Agreement is attached
as Exhibit A thereto. Shareholders of record at the close of business on
November 30, 1998 are entitled to notice of, and to vote at, the Meeting.
Please read the Proxy Statement and Prospectus carefully before telling us,
through your proxy or in person, how you wish your shares to be voted. THE
BOARD OF TRUSTEES OF CAPITAL APPRECIATION RECOMMENDS YOU VOTE IN FAVOR OF THE
REORGANIZATION. WE URGE YOU TO SIGN, DATE AND MAIL THE ENCLOSED PROXY PROMPTLY.
By Order of the Board of Trustees,
BARRY FINK,
Secretary
December 4, 1998
YOU CAN HELP AVOID THE NECESSITY AND EXPENSE OF SENDING FOLLOW-UP LETTERS TO
ENSURE A QUORUM BY PROMPTLY RETURNING THE ENCLOSED PROXY. IF YOU ARE UNABLE
TO BE PRESENT IN PERSON, PLEASE FILL IN, SIGN AND RETURN THE ENCLOSED PROXY
IN ORDER THAT THE NECESSARY QUORUM BE REPRESENTED AT THE MEETING. THE
ENCLOSED ENVELOPE REQUIRES NO POSTAGE IF MAILED IN THE UNITED STATES.
<PAGE>
MORGAN STANLEY DEAN WITTER AMERICAN VALUE FUND
TWO WORLD TRADE CENTER, NEW YORK, NEW YORK 10048
(212) 392-2550
ACQUISITION OF THE ASSETS OF
MORGAN STANLEY DEAN WITTER CAPITAL APPRECIATION FUND
BY AND IN EXCHANGE FOR SHARES OF
MORGAN STANLEY DEAN WITTER AMERICAN VALUE FUND
This Proxy Statement and Prospectus is being furnished to shareholders of
Morgan Stanley Dean Witter Capital Appreciation Fund ("Capital Appreciation")
in connection with an Agreement and Plan of Reorganization, dated October 28,
1998 (the "Reorganization Agreement"), pursuant to which substantially all the
assets of Capital Appreciation will be combined with those of Morgan Stanley
Dean Witter American Value Fund ("American Value") in exchange for shares of
American Value (the "Reorganization"). As a result of this transaction,
shareholders of Capital Appreciation will become shareholders of American Value
and will receive shares of American Value with a value equal to the value of
their holdings in Capital Appreciation. The terms and conditions of this
transaction are more fully described in this Proxy Statement and Prospectus and
in the Reorganization Agreement between Capital Appreciation and American
Value, attached hereto as Exhibit A. The address of Capital Appreciation is
that of American Value set forth above. This Proxy Statement also constitutes a
Prospectus of American Value, which is dated December 4, 1998, filed by
American Value with the Securities and Exchange Commission (the "Commission")
as part of its Registration Statement on Form N-14 (the "Registration
Statement").
American Value is an open-end diversified management investment company
whose investment objective is long-term capital growth consistent with an
effort to reduce volatility. The fund seeks to achieve its objective by
investing principally in the common stock of companies in industries which, at
the time of investment, are believed to be attractively valued given their
above average relative earnings growth potential at that time.
This Proxy Statement and Prospectus sets forth concisely information about
American Value that shareholders of Capital Appreciation should know before
voting on the Reorganization Agreement. A copy of the Prospectus for American
Value dated May 1, 1998, As Revised August 21, 1998, is attached as Exhibit B
and incorporated herein by reference. Also enclosed and incorporated herein by
reference is American Value's Annual Report for the fiscal year ended December
31, 1997 and the succeeding unaudited Semi-Annual Report for the six months
ended June 30, 1998. A Statement of Additional Information relating to the
Reorganization, described in this Proxy Statement and Prospectus (the
"Additional Statement"), dated December 4, 1998, has been filed with the
Commission and is also incorporated herein by reference. Also incorporated
herein by reference are Capital Appreciation's Prospectus, dated January 29,
1998, and Annual Report for its fiscal year ended November 30, 1997 and the
succeeding unaudited Semi-Annual Report for the six months ended May 31, 1998.
Such documents are available without charge by calling (212) 392-2550 or (800)
869-NEWS (TOLL FREE).
Investors are advised to read and retain this Proxy Statement and Prospectus
for future reference.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED ON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS
A CRIMINAL OFFENSE.
THIS PROXY STATEMENT AND PROSPECTUS IS DATED DECEMBER 4, 1998.
<PAGE>
MORGAN STANELY DEAN WITTER CAPITAL APPRECIATION FUND
TWO WORLD TRADE CENTER
NEW YORK, NEW YORK 10048
(212) 392-2550
--------------------
PROXY STATEMENT AND PROSPECTUS
--------------------
SPECIAL MEETING OF SHAREHOLDERS
TO BE HELD FEBRUARY 24, 1999
INTRODUCTION
GENERAL
This Proxy Statement and Prospectus is being furnished to the shareholders
of Morgan Stanley Dean Witter Capital Appreciation Fund ("Capital
Appreciation"), an open-end diversified management investment company, in
connection with the solicitation by the Board of Trustees of Capital
Appreciation (the "Board") of proxies to be used at the Special Meeting of
Shareholders of Capital Appreciation to be held in Conference Room A,
Forty-Fourth Floor, Two World Trade Center, New York, New York 10048 at 10:00
A.M., New York time, on February 24, 1999, and any adjournments thereof (the
"Meeting"). It is expected that the mailing of this Proxy Statement and
Prospectus will be made on or about December 7, 1998.
At the Meeting, Capital Appreciation shareholders ("Shareholders") will
consider and vote upon an Agreement and Plan of Reorganization, dated October
28, 1998 (the "Reorganization Agreement"), between Capital Appreciation and
Morgan Stanley Dean Witter American Value Fund ("American Value") pursuant to
which substantially all of the assets of Capital Appreciation will be combined
with those of American Value in exchange for shares of American Value. As a
result of this transaction, Shareholders will become shareholders of American
Value and will receive shares of American Value equal to the value of their
holdings in Capital Appreciation on the date of such transaction (the
"Reorganization"). Pursuant to the Reorganization, each Shareholder will
receive the class of shares of American Value that corresponds to the class of
shares of Capital Appreciation currently held by that Shareholder. Accordingly,
as a result of the Reorganization, each Class A, Class B, Class C and Class D
Shareholder of Capital Appreciation will receive Class A, Class B, Class C and
Class D shares of American Value, respectively. The shares to be issued by
American Value pursuant to the Reorganization (the "American Value Shares")
will be issued at net asset value without an initial sales charge. Further
information relating to American Value is set forth herein and in American
Value's current Prospectus, dated May 1, 1998, As Revised August 21, 1998
("American Value's Prospectus"), attached to this Proxy Statement and
Prospectus and incorporated herein by reference.
The information concerning Capital Appreciation contained herein has been
supplied by Capital Appreciation and the information concerning American Value
contained herein has been supplied by American Value.
RECORD DATE; SHARE INFORMATION
The Board has fixed the close of business on November 30, 1998 as the
record date (the "Record Date") for the determination of the Shareholders
entitled to notice of, and to vote at, the Meeting. As of the Record
1
<PAGE>
Date, there were shares of Capital Appreciation issued and outstanding.
Shareholders on the Record Date are entitled to one vote per share on each
matter submitted to a vote at the Meeting. A majority of the outstanding shares
entitled to vote, represented in person or by proxy, will constitute a quorum
at the Meeting.
[ was known to own 5% or more of the outstanding shares of
Capital Appreciation as of the Record Date ( shares). As of the Record
Date, the trustees and officers of Capital Appreciation, as a group, owned less
than 1% of the outstanding shares of Capital Appreciation.]
[To the knowledge of American Value's Board of Trustees, as of the Record
Date, no person owned of record or beneficially 5% or more of the outstanding
shares of American Value. As of the Record Date, the trustees and officers of
American Value, as a group, owned less than 1% of the outstanding shares of
American Value.]
PROXIES
The enclosed form of proxy, if properly executed and returned, will be
voted in accordance with the choice specified thereon. The proxy will be voted
in favor of the Reorganization Agreement unless a choice is indicated to vote
against or to abstain from voting on the Reorganization Agreement. The Board
knows of no business, other than that set forth in the Notice of Special
Meeting of Shareholders, to be presented for consideration at the Meeting.
However, the proxy confers discretionary authority upon the persons named
therein to vote as they determine on other business, not currently
contemplated, which may come before the Meeting. Abstentions and, if
applicable, broker "non-votes" will not count as votes in favor of the
Reorganization Agreement, and broker "non-votes" will not be deemed to be
present at the meeting for purposes of determining whether the Reorganization
Agreement has been approved. Broker "non-votes" are shares held in street name
for which the broker indicates that instructions have not been received from
the beneficial owners or other persons entitled to vote and for which the
broker does not have discretionary voting authority. If a Shareholder executes
and returns a proxy but fails to indicate how the votes should be cast, the
proxy will be voted in favor of the Reorganization Agreement. The proxy may be
revoked at any time prior to the voting thereof by: (i) delivering written
notice of revocation to the Secretary of Capital Appreciation at Two World
Trade Center, New York, New York 10048; (ii) attending the Meeting and voting
in person; or (iii) signing and returning a new proxy (if returned and received
in time to be voted). Attendance at the Meeting will not in and of itself
revoke a proxy.
In the event that the necessary quorum to transact business or the vote
required to approve or reject the Reorganization Agreement is not obtained at
the Meeting, the persons named as proxies may propose one or more adjournments
of the Meeting to permit further solicitation of proxies. Any such adjournment
will require the affirmative vote of the holders of a majority of shares of
Capital Appreciation present in person or by proxy at the Meeting. The persons
named as proxies will vote in favor of such adjournment those proxies which
they are entitled to vote in favor of the Reorganization Agreement and will
vote against any such adjournment those proxies required to be voted against
the Reorganization Agreement.
EXPENSES OF SOLICITATION
All expenses of this solicitation, including the cost of preparing and
mailing this Proxy Statement and Prospectus, will be borne by Capital
Appreciation which expenses are expected to approximate $182,000. Capital
Appreciation and American Value will bear all of their respective other
expenses associated with the Reorganization. In addition to the solicitation of
proxies by mail, proxies may be solicited by officers of Capital Appreciation,
and officers and regular employees of Morgan Stanley Dean Witter Advisors Inc.
("MSDW Advisors" or the "Investment Manager") and Morgan Stanley Dean Witter
Trust FSB ("MSDW Trust"),
2
<PAGE>
personally or by mail, telephone, telegraph or otherwise, without compensation
therefor. Brokerage houses, banks and other fiduciaries may be requested to
forward soliciting material to the beneficial owners of shares and to obtain
authorization for the execution of proxies.
MSDW Trust, an affiliate of MSDW Advisors, may call Shareholders to ask if
they would be willing to have their votes recorded by telephone. The telephone
voting procedure is designed to authenticate Shareholders' identities, to allow
Shareholders to authorize the voting of their shares in accordance with their
instructions and to confirm that their instructions have been recorded
properly. No recommendation will be made as to how a Shareholder should vote on
the Reorganization Agreement other than to refer to the recommendation of the
Board. Capital Appreciation has been advised by counsel that these procedures
are consistent with the requirements of applicable law. Shareholders voting by
telephone will be asked for their social security number or other identifying
information and will be given an opportunity to authorize proxies to vote their
shares in accordance with their instructions. To ensure that the Shareholders'
instructions have been recorded correctly they will receive a confirmation of
their instructions in the mail. A special toll-free number will be available in
case the information contained in the confirmation is incorrect. Although a
Shareholder's vote may be taken by telephone, each Shareholder will receive a
copy of this Proxy Statement and Prospectus and may vote by mail using the
enclosed proxy card.
VOTE REQUIRED
Approval of the Reorganization Agreement by the Shareholders requires the
affirmative vote of a majority (i.e., more than 50%) of the shares of Capital
Appreciation represented in person or by proxy and entitled to vote at the
Meeting, provided a quorum is present at the Meeting. If the Reorganization
Agreement is not approved by Shareholders, Capital Appreciation will continue
in existence and the Board will consider alternative actions.
SYNOPSIS
The following is a synopsis of certain information contained in or
incorporated by reference in this Proxy Statement and Prospectus. This synopsis
is only a summary and is qualified in its entirety by the more detailed
information contained or incorporated by reference in this Proxy Statement and
Prospectus and the Reorganization Agreement. Shareholders should carefully
review this Proxy Statement and Prospectus and The Reorganization Agreement in
their entirety and, in particular, American Value's Prospectus, which is
attached to this Proxy Statement and incorporated herein by reference.
THE REORGANIZATION
The Reorganization Agreement provides for the transfer of substantially
all the assets of Capital Appreciation, subject to stated liabilities, to
American Value in exchange for the American Value Shares. The aggregate net
asset value of the American Value Shares issued in the exchange will equal the
aggregate value of the net assets of Capital Appreciation received by American
Value. On or after the closing date scheduled for the Reorganization (the
"Closing Date"), Capital Appreciation will distribute the American Value Shares
received by Capital Appreciation to Shareholders as of the Valuation Date (as
defined below under "The Reorganization Agreement") in complete liquidation of
Capital Appreciation and Capital Appreciation will thereafter be dissolved and
deregistered under the Investment Company Act of 1940, as amended (the "1940
Act"). As a result of the Reorganization, each Shareholder will receive that
number of full and fractional American Value Shares equal in value to such
Shareholder's pro rata interest in the net assets of Capital Appreciation
transferred to American Value. Pursuant to the Reorganization, each Shareholder
will receive the class of shares of American Value that corresponds to the
class of shares of Capital Appreciation currently held
3
<PAGE>
by that Shareholder. Accordingly, as a result of the Reorganization, each Class
A, Class B, Class C and Class D Shareholder of Capital Appreciation will become
holders of Class A, Class B, Class C and Class D shares of American Value,
respectively. Shareholders holding their shares of Capital Appreciation in
certificate form will be asked to surrender their certificates in connection
with the Reorganization. Shareholders who do not surrender their certificates
prior to the Closing Date will still receive their shares of American Value;
however, such Shareholders will not be able to redeem, transfer or exchange the
American Value Shares received until the old certificates have been
surrendered. The Board has determined that the interests of Shareholders will
not be diluted as a result of the Reorganization.
FOR THE REASONS SET FORTH BELOW UNDER "THE REORGANIZATION -- THE BOARD'S
CONSIDERATION," THE BOARD, INCLUDING THE TRUSTEES WHO ARE NOT "INTERESTED
PERSONS" OF CAPITAL APPRECIATION ("INDEPENDENT TRUSTEES"), AS THAT TERM IS
DEFINED IN THE 1940 ACT, HAS CONCLUDED THAT THE REORGANIZATION IS IN THE BEST
INTERESTS OF CAPITAL APPRECIATION AND ITS SHAREHOLDERS AND RECOMMENDS APPROVAL
OF THE REORGANIZATION AGREEMENT.
FEE TABLE
Capital Appreciation and American Value each pay expenses for management
of their assets, distribution of their shares and other services, and those
expenses are reflected in the net asset value per share of each fund. On July
28, 1997, each of Capital Appreciation and American Value began offering its
shares in multiple classes, each with a different combination of sales charges,
ongoing fees and other features. The following table illustrates expenses and
fees that each class of shares of Capital Appreciation incurred during the
fund's fiscal year ended November 30, 1997 adjusted, with respect to Class A,
Class C and Class D shares of the fund, for the shareholder transaction
expenses and 12b-1 fees in effect for such classes as of July 28, 1997. With
respect to American Value, the table sets forth expenses and fees based on the
fund's December 31, 1997 fiscal year end, adjusted, with respect to Class A,
Class C and Class D shares of the fund, for the shareholder transaction
expenses and 12b-1 fees in effect for such classes as of July 28, 1997. The
table also sets forth pro forma fees for the surviving combined fund (American
Value) reflecting what the fee schedule would have been on December 31, 1997,
if the Reorganization had been consummated twelve (12) months prior to that
date.
4
<PAGE>
Shareholder Transaction Expenses
<TABLE>
<CAPTION>
CAPITAL AMERICAN PRO FORMA
APPRECIATION VALUE COMBINED
-------------- --------------- ---------------
<S> <C> <C> <C>
MAXIMUM SALES CHARGE IMPOSED ON PURCHASES
(AS A PERCENTAGE OF OFFERING PRICE)
Class A ............................................... 5.25%(1) 5.25%(1) 5.25%(1)
Class B ............................................... none none none
Class C ............................................... none none none
Class D ............................................... none none none
MAXIMUM SALES CHARGE IMPOSED ON REINVESTED DIVIDENDS
Class A ............................................... none none none
Class B ............................................... none none none
Class C ............................................... none none none
Class D ............................................... none none none
MAXIMUM CONTINGENT DEFERRED SALES CHARGE (AS A
PERCENTAGE OF THE LESSER OF ORIGINAL PURCHASE PRICE OR
REDEMPTION PROCEEDS)
Class A ............................................... none (2) none (2) none (2)
Class B ............................................... 5.00%(3) 5.00%(3) 5.00%(3)
Class C ............................................... 1.00%(4) 1.00%(4) 1.00%(4)
Class D ............................................... none none none
REDEMPTION FEES
Class A ............................................... none none none
Class B ............................................... none none none
Class C ............................................... none none none
Class D ............................................... none none none
EXCHANGE FEE
Class A ............................................... none none none
Class B ............................................... none none none
Class C ............................................... none none none
Class D ............................................... none none none
</TABLE>
Annual Fund Operating Expenses As a Percentage of Average Net Assets
<TABLE>
<CAPTION>
CAPITAL AMERICAN PRO FORMA
APPRECIATION VALUE COMBINED
-------------- --------------- ---------------
<S> <C> <C> <C>
MANAGEMENT AND ADVISORY FEE
Class A ................... 0.75% 0.50% 0.49%(5)
Class B ................... 0.75% 0.50% 0.49%(5)
Class C ................... 0.75% 0.50% 0.49%(5)
Class D ................... 0.75% 0.50% 0.49%(5)
12B-1 FEES(6)(7)(8)
Class A ................... 0.25% 0.25% 0.25%
Class B ................... 1.00% 0.83%(8) 0.86%(8)
Class C ................... 1.00% 1.00% 1.00%
Class D ................... none none none
</TABLE>
5
<PAGE>
<TABLE>
<CAPTION>
CAPITAL AMERICAN PRO FORMA
APPRECIATION VALUE COMBINED
-------------- ---------- -----------
<S> <C> <C> <C>
OTHER EXPENSES
Class A ........................ 0.25% 0.13% 0.14%
Class B ........................ 0.25% 0.13% 0.14%
Class C ........................ 0.25% 0.13% 0.14%
Class D ........................ 0.25% 0.13% 0.14%
TOTAL FUND OPERATING EXPENSES(9)
Class A ........................ 1.25% 0.88% 0.88%
Class B ........................ 2.00% 1.46% 1.49%
Class C ........................ 2.00% 1.63% 1.63%
Class D ........................ 1.00% 0.63% 0.63%
</TABLE>
- ----------
(1) Reduced for purchases of $25,000 and over (see "Purchase of Fund Shares
-- Initial Sales Charge Alternative -- Class A Shares" in each fund's
Prospectus).
(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 on redemptions made within one year after
purchase, except for certain specific circumstances (see "Purchases,
Exchanges and Redemptions" below and "Purchase of Fund Shares -- Initial
Sales Charge Alternative -- Class A Shares" in each fund's Prospectus).
(3) The CDSC is scaled down to 1.00% during the sixth year, reaching zero
thereafter.
(4) Only applicable to redemptions made within one year after purchase (see
"Purchases, Exchanges and Redemptions" below and "Purchase of Fund Shares
-- Level Load Alternative -- Class C Shares" in each fund's Prospectus).
(5) This rate reflects the anticipated lower advisory fee of American Value
obtained by the effect of having additional assets at a lower breakpoint
in the advisory fee upon the combination of the two funds based upon
Capital Appreciation's average net assets for the fiscal year ended
November 30, 1997 and American Value's average net assets for the fiscal
year ended December 31, 1997, thus, a scaling down of the advisory fee to
the effective advisory fee rate shown.
(6) The 12b-1 fee is accrued daily and payable monthly. With respect to each
fund, the entire 12b-1 fee payable by Class A and a portion of the 12b-1
fee payable by each of Class B and Class C equal to 0.25% of the average
daily net assets of the class are currently characterized as a service
fee within the meaning of National Association of Securities Dealers,
Inc. ("NASD") guidelines and are payments made for personal service and/
or maintenance of shareholder accounts. The remainder of the 12b-1 fee,
if any, is an asset-based sales charge, and is a distribution fee paid to
Morgan Stanley Dean Witter Distributors Inc. (the "Distributor") to
compensate it for the services provided and the expenses borne by the
Distributor and others in the distribution of each fund's shares (see
"Description of Shares" below and "Purchase of Fund Shares -- Plan of
Distribution" in each fund's Prospectus).
(7) Upon conversion of Class B shares to Class A shares, such shares will be
subject to the lower 12b-1 fee applicable to Class A shares. No sales
charge is imposed at the time of conversion of Class B shares to Class A
shares. Class C shares do not have a conversion feature and, therefore,
are subject to an ongoing 1.00% 12b-1 fee (see "Description of Shares"
below and "Purchase of Fund Shares -- Alternative Purchase Arrangements"
in each fund's Prospectus).
(8) Although the formula for calculating the 12b-1 fees for the Class B
shares is similar for both funds, the application of the formula (1.0% of
the lesser of average daily net sales or average daily net assets)
results in lower annual 12b-1 fees on the existing assets of the Class B
shares of American Value. Upon the consummation of the Reorganization,
the assets of Capital Appreciation are treated under the formula as new
sales and a 1.0% rate is applied thereto. When combined with the existing
assets of American Value, the effect initially is a slight increase in
the annual 12b-1 fees on the Class B shares of the combined fund.
(9) There were no outstanding shares of Class A, Class C or Class D prior to
July 28, 1997. Accordingly, "Total Fund Operating Expenses" as shown
above with respect to those Classes, are estimates based upon the sum of
12b-1 Fees, Management Fees and "Other Expenses."
6
<PAGE>
HYPOTHETICAL EXPENSES
To attempt to show the effect of these expenses on an investment over
time, the hypotheticals shown below have been created. Assuming that an
investor makes a $1,000 investment in either Capital Appreciation or American
Value or the new combined fund (American Value), that the annual return is 5%
and that the operating expenses for each fund are the ones shown in the chart
above, if the investment was redeemed at the end of each period shown below,
the investor would incur the following expenses by the end of each period
shown:
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
-------- --------- --------- ---------
<S> <C> <C> <C> <C>
Capital Appreciation
Class A ........... $ 65 $ 90 $ 118 $ 196
Class B ........... $ 70 $ 93 $ 128 $ 233
Class C ........... $ 30 $ 63 $ 108 $ 233
Class D ........... $ 10 $ 32 $ 55 $ 123
American Value
Class A ........... $ 61 $ 79 $ 99 $ 155
Class B ........... $ 65 $ 76 $ 100 $ 175
Class C ........... $ 27 $ 51 $ 89 $ 193
Class D ........... $ 6 $ 20 $ 35 $ 79
Pro Forma Combined
Class A ........... $ 61 $ 79 $ 99 $ 155
Class B ........... $ 65 $ 77 $ 101 $ 178
Class C ........... $ 27 $ 51 $ 89 $ 193
Class D ........... $ 6 $ 20 $ 35 $ 79
</TABLE>
If such investment was not redeemed, the investor would incur the
following expenses:
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
-------- --------- --------- ---------
<S> <C> <C> <C> <C>
Capital Appreciation
Class A ........... $65 $ 90 $ 118 $ 196
Class B ........... $20 $ 63 $ 108 $ 233
Class C ........... $20 $ 63 $ 108 $ 233
Class D ........... $10 $ 32 $ 55 $ 123
American Value
Class A ........... $61 $ 79 $ 99 $ 155
Class B ........... $15 $ 46 $ 80 $ 175
Class C ........... $17 $ 51 $ 89 $ 193
Class D ........... $6 $ 20 $ 35 $ 79
Pro Forma Combined
Class A ........... $61 $ 79 $ 99 $ 155
Class B ........... $15 $ 47 $ 81 $ 178
Class C ........... $17 $ 51 $ 89 $ 193
Class D ........... $ 6 $ 20 $ 35 $ 79
</TABLE>
THE ABOVE EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR
FUTURE EXPENSES OR PERFORMANCE. ACTUAL OPERATING EXPENSES MAY BE GREATER OR
LESS THAN THOSE SHOWN. LONG-TERM SHAREHOLDERS OF CLASS A, CLASS B AND CLASS C
SHARES OF CAPITAL APPRECIATION AND AMERICAN VALUE MAY PAY MORE IN SALES CHARGES
INCLUDING DISTRIBUTION FEES THAN THE ECONOMIC EQUIVALENT OF THE MAXIMUM
FRONT-END SALES CHARGES PERMITTED BY THE NASD.
The purpose of the foregoing fee table is to assist the investor or
shareholder in understanding the various costs and expenses that an investor or
shareholder in the Fund will bear directly or indirectly. For a more complete
description of these costs and expenses, see "Comparison of Capital
Appreciation and American Value -- Investment Management and Distribution Plan
Fees, Other Significant Fees, and Purchases, Exchanges and Redemptions" below.
7
<PAGE>
TAX CONSEQUENCES OF THE REORGANIZATION
As a condition to the Reorganization, Capital Appreciation will receive an
opinion of Gordon Altman Butowsky Weitzen Shalov & Wein to the effect that the
Reorganization will constitute a tax-free reorganization for Federal income tax
purposes, and that no gain or loss will be recognized by Capital Appreciation
or the shareholders of Capital Appreciation for Federal income tax purposes as
a result of the transactions included in the Reorganization. For further
information about the tax consequences of the Reorganization, see "The
Reorganization -- Tax Aspects of the Reorganization" below.
COMPARISON OF CAPITAL APPRECIATION AND AMERICAN VALUE
INVESTMENT OBJECTIVES AND POLICIES. Capital Appreciation and American
Value are funds which have similar investment objectives and policies. The
investment objective of Capital Appreciation is long-term capital appreciation.
The investment objective of American Value is long-term capital growth
consistent with an effort to reduce volatility.
Capital Appreciation seeks to achieve its investment objective by
investing, under normal circumstances, at least 65% of its total assets in the
common stocks of U.S. companies that, in the opinion of the Investment Manager,
offer the potential for either superior earnings growth and/or appear to be
undervalued. The fund's holdings are widely diversified by industry and by
companies of all asset sizes and there is no limitation on the stock price of
any particular investment. American Value seeks to achieve its investment
objective by investing in a diversified portfolio of securities consisting
principally of common stocks in those industries that, at the time of
investment, are attractively valued given their above average relative earnings
growth potential at the time. As a result, American Value is typically
over-weighted in those sectors deemed to be attractive given their potential
for above average earnings growth. Up to 35% of the assets of Capital
Appreciation may be invested in debt or preferred equity securities convertible
into or exchangeable for equity securities and rights and warrants when
considered by the Investment Manager to be consistent with the Fund's
investment objective; the fund may invest in debt securities without regard to
quality or rating, although the fund will not purchase a non-investment grade
debt security if immediately after such purchase, the fund would have more than
5% of its total assets invested in such securities. Additionally, Capital
Appreciation may invest up to 10% of its assets in foreign securities. With
respect to American Value, the fund may invest up to 35% of its portfolio in
common stocks of non-U.S. companies, in companies or industries which have not
been determined to be attractively valued or moderately attractively valued by
the Investment Manager, and in convertible debt securities and warrants,
convertible preferred securities, U.S. Government securities (securities issued
or guaranteed as to principal and interest by the United States or its agencies
and instrumentalities) and investment grade corporate debt securities when, in
the opinion of the Investment Manager, the projected total return on such
securities is equal to or greater than the expected total return on common
stocks, or when such holdings might be expected to reduce the volatility of the
portfolio, and in money market instruments. The processes by which each fund
selects common stocks and other investments may differ and are more fully
described under "Comparison of Investment Objectives, Policies and
Restrictions" below.
The principal differences between the funds' investment policies, as well
as certain similarities, are more fully described under "Comparison of
Investment Objectives, Policies and Restrictions" below.
The investment policies of both Capital Appreciation and American Value
are not fundamental and may be changed by their respective Boards of Trustees.
8
<PAGE>
INVESTMENT MANAGEMENT AND DISTRIBUTION PLAN FEES. Capital Appreciation
and American Value obtain investment management services from MSDW Advisors.
With respect to Capital Appreciation, the fund pays MSDW Advisors monthly
compensation calculated daily by applying the annual rate of 0.75% to the first
$500 million of the fund's average daily net assets and 0.725% to the fund's
average net assets exceeding $500 million. With respect to American Value, the
fund pays MSDW Advisors monthly compensation calculated daily by applying the
annual rate of 0.625% to the portion of the fund's average daily net assets not
exceeding $250 million; 0.50% to the portion of such daily net assets exceeding
$250 million, but not exceeding $2.5 billion; 0.475% to the portion of such
daily net assets exceeding $2.5 billion, but not exceeding $3.5 billion; 0.45%
to the portion of such daily net assets exceeding $3.5 billion but not
exceeding $4.5 billion; and 0.425% to the portion of such daily net assets
exceeding $4.5 billion. Each class of both funds' shares is subject to the same
management fee rates applicable to the respective fund.
Both Capital Appreciation and American Value have adopted similar
distribution plans ("Plans") pursuant to Rule 12b-1 under the 1940 Act. In the
case of Class A and Class C shares, each fund's Plan provides that the fund
will reimburse the Distributor and others for the expenses of certain
activities and services incurred by them in connection with the distribution of
the Class A and Class C Shares of the fund. Reimbursement for these expenses is
made in monthly payments by each fund to the Distributor which will in no event
exceed amounts equal to payments at the annual rates of 0.25% and 1.0% of the
average daily net assets of Class A and Class C shares, respectively. In the
case of Class B shares, Capital Appreciation's Plan provides that the fund will
pay the Distributor a fee, which is accrued daily and paid monthly, at the
annual rate of 1.0% of the lesser of (a) the average daily net sales of the
fund's Class B shares or (b) the average daily net assets of Class B of the
fund. In the case of American Value's Class B shares, American Value's Plan
provides that the fund will pay the Distributor a fee, which is accrued daily
and paid monthly, at the annual rate of (i) 1.0% of the lesser of (a) the
average daily net sales of the fund's Class B shares since the implementation
of the Plan on April 30, 1984 or (b) the average daily net assets of Class B
attributable to shares issued, net of related shares redeemed, since
implementation of the Plan. The fee is paid for the services provided and the
expenses borne by the Distributor and others in connection with the
distribution of each fund's Class B shares. There are no 12b-1 fees applicable
to both funds' Class D shares. For further information relating to the 12b-1
fees applicable to each class of American Value's shares, see the section
entitled "Purchase of Fund Shares" in American Value's Prospectus, attached
hereto. The Distributor also receives the proceeds of any contingent deferred
sales charge ("CDSC") paid by the funds' shareholders at the time of
redemption. The CDSC schedules applicable to each of Capital Appreciation and
American Value are set forth below under "Purchases, Exchanges and
Redemptions."
OTHER SIGNIFICANT FEES. Both Capital Appreciation and American Value pay
additional fees in connection with their operations, including legal, auditing,
transfer agent, trustees fees and custodial fees. See "Synopsis -- Fee Table"
above for the percentage of average net assets represented by such "Other
Expenses."
PURCHASES, EXCHANGES AND REDEMPTIONS. Class A shares of each fund are sold
at net asset value plus an initial sales charge of up to 5.25%. The initial
sales charge is reduced for certain purchases. Investments of $1 million or
more (and investment by certain other limited categories of investors) are not
subject to any sales charges at the time of purchase, but are subject to a CDSC
of 1.0% on redemptions made within one year after purchase (except for certain
specific circumstances fully described in each fund's Prospectus).
9
<PAGE>
Class B shares of each fund are offered at net asset value with no initial
sales charge, but are subject to the same CDSC schedule set forth below (Class
B shares of each fund purchased by certain qualified employer sponsored benefit
plans are subject to a reduced CDSC schedule):
<TABLE>
<CAPTION>
CLASS B SHARES OF CAPITAL APPRECIATION AND
YEAR SINCE PURCHASE PAYMENT MADE AMERICAN VALUE
- ------------------------------------- -------------------------------------------
<S> <C>
First .......................... 5.0%
Second ......................... 4.0%
Third .......................... 3.0%
Fourth ......................... 2.0%
Fifth .......................... 2.0%
Sixth .......................... 1.0%
Seventh and thereafter ......... none
</TABLE>
Class C shares of each fund are sold at net asset value with no initial
sales charge, but are subject to a CDSC of 1.0% on redemptions made within one
year after purchase. The CDSC may be waived for certain redemptions (which are
fully described in each fund's Prospectus).
Class D shares of each fund are available only to limited categories of
investors and are sold at net asset value with no initial sales charge or CDSC.
The CDSC charge is paid to the Distributor. Shares of American Value and
Capital Appreciation are distributed by the Distributor and offered by Dean
Witter Reynolds Inc. and other dealers who have entered into selected dealer
agreements with the Distributor. For further information relating to the CDSC
schedules applicable to each of the classes of American Value's shares, see the
section entitled "Purchase of Fund Shares" in American Value's Prospectus.
Shares of each class of Capital Appreciation and American Value may be
exchanged for shares of the same class of any other Morgan Stanley Dean Witter
Fund that offers its shares in more than one class, without the imposition of
an exchange fee. Additionally, shares of each class of Capital Appreciation and
American Value may be exchanged for shares of Morgan Stanley Dean Witter
Short-Term U.S. Treasury Trust, Morgan Stanley Dean Witter Limited Term
Municipal Trust, Morgan Stanley Dean Witter Short-Term Bond Fund and the five
Morgan Stanley Dean Witter Funds that are money market funds (the foregoing
eight funds are collectively referred to as the "Exchange Funds"), without the
imposition of an exchange fee. Class A shares of Capital Appreciation and
American Value may also be exchanged for shares of Morgan Stanley Dean Witter
Multi-State Municipal Series Trust and Morgan Stanley Dean Witter Hawaii
Municipal Trust. Upon consummation of the Reorganization, the foregoing
exchange privileges will still be applicable to shareholders of the combined
fund (American Value).
With respect to both funds, no CDSC is imposed at the time of any
exchange, although any applicable CDSC will be imposed upon ultimate
redemption. During the period of time an American Value or Capital Appreciation
shareholder remains in an Exchange Fund, the holding period (for purposes of
determining the CDSC rate) is frozen. Both Capital Appreciation and American
Value provide telephone exchange privileges to their shareholders. For greater
details relating to exchange privileges applicable to American Value, see the
section entitled "Shareholder Services" in American Value's Prospectus.
Shareholders of Capital Appreciation and American Value may redeem their
shares for cash at any time at the net asset value per share next determined;
however, such redemption proceeds may be reduced by the amount of any
applicable CDSC. Both Capital Appreciation and American Value offer a
reinstatement privilege whereby a shareholder who has not previously exercised
such privilege whose shares have been
10
<PAGE>
redeemed or repurchased may, within thirty-five days after the date of
redemption or repurchase, reinstate any portion or all of the proceeds thereof
in shares of the same class from which such shares were redeemed or repurchased
and receive a pro rata credit for any CDSC paid in connection with such
redemption or repurchase. Capital Appreciation and American Value may redeem
involuntarily, at net asset value, most accounts valued at less than $100.
DIVIDENDS. Each fund declares dividends separately for each of its
classes. Capital Appreciation pays quarterly dividends from the net investment
income of the fund. American Value intends to pay dividends from the net
investment income of the fund as well as net short-term capital gains, if any,
semi-annually. Both funds distribute net long-term capital gains, and in the
case of Capital Appreciation, net short-term capital gains, if any, at least
annually. Each fund, however, may determine either to distribute or to retain
all or part of any net long-term capital gains in any year for reinvestment.
With respect to each fund, dividends and capital gains distributions are
automatically reinvested in additional shares of the same class of shares of
the fund at net asset value unless the shareholder elects to receive cash.
PRINCIPAL RISK FACTORS
The net asset value of American Value and Capital Appreciation will
fluctuate with changes in the market value of their respective portfolio
securities. The market value of the funds' portfolio securities will increase
or decrease due to a variety of economic, market and political factors,
including movements in interest rates, which cannot be predicted. All
fixed-income securities are subject to two types of risk: credit risk and
interest rate risk. Credit risk relates to the ability of the issuer to meet
interest or principal payments or both as they come due. Interest rate risk
refers to the fluctuations in the net asset value of any portfolio of
fixed-income securities resulting from the inverse relationship between price
and yield of fixed-income securities; that is, when the general level of
interest rates rises, the prices of outstanding fixed-income securities
decline, and when interest rates fall, prices rise.
Both funds may invest a portion (up to 35% for American Value and up to
10% for Capital Appreciation) of their assets in foreign securities and, as
such, are subject to additional risks such as adverse political and economic
developments abroad, including the possibility of expropriations or
confiscatory taxation, limitations on the use or transfer of fund assets and
any effects of foreign social, economic or political instability. Foreign
companies are not subject to the regulatory requirements of U.S. companies and,
as such, there may be less publicly available information about such companies.
Moreover, foreign companies are not subject to uniform accounting, auditing and
financial reporting standards and requirements comparable to those applicable
to U.S. companies. Additionally, securities of foreign issuers may be less
liquid than comparable securities of U.S. issuers and, as such, their price
changes may be more volatile. Furthermore, foreign exchanges and broker-dealers
are generally subject to less government and exchange scrutiny and regulation
than their American counterparts and brokerage commissions, dealer concessions
and other transaction costs may be higher on foreign markets than in the U.S.
Fluctuations in the relative rates of exchange between the currencies of
different countries will affect the value of a fund's investments. Changes in
foreign currency exchange rates relative to the U.S. dollar will affect the
U.S. dollar value of a fund's assets denominated in that currency and thereby
impact upon the fund's total return on such assets.
Capital Appreciation may invest up to 5% of its total assets in debt
securities rated below investment grade, which securities are subject to
certain special risks not associated with higher rated, investment grade debt
securities; whereas American Value does not invest in debt securities rated
below investment grade.
Capital Appreciation and American Value may enter into foreign currency
exchange contracts when purchasing foreign securities in order to facilitate
settlement and to limit the effect of changes in the relationship between the
U.S. dollar and the foreign currency during the period between trade date and
11
<PAGE>
settlement date. Capital Appreciation may enter into reverse repurchase
agreements and dollar rolls and both funds may enter into repurchase
agreements, may purchase securities on a when-issued and delayed delivery
basis, or on a when, as and if issued basis, may lend their portfolio
securities, and may enter into options and futures transactions, all of which
involve certain special risks. Both Capital Appreciation and American Value may
invest in or acquire convertible securities which are fixed-income securities
convertible into common stock. To the extent that a convertible security's
investment value is greater than its conversion value, its price will be
primarily a reflection of such investment value and its price will be likely to
increase when interest rates fall and decrease when interest rates rise, as
with a fixed-income security (the credit standing of the issuer and other
factors may also have an effect on the convertible security's value). If the
conversion value exceeds the investment value, the price of the convertible
security will rise above its investment value and, in addition, the convertible
security will sell at some premium over its conversion value. (This premium
represents the price investors are willing to pay for the privilege of
purchasing a fixed-income security with a possibility of capital appreciation
due to the conversion privilege.) At such times the price of the convertible
security will tend to fluctuate directly with the price of the underlying
equity security.
The foregoing discussion is a summary of the principal risk factors. For a
more complete discussion of the risks of each fund, see "Investment Objective
and Policies -- Risk Considerations" in the Prospectus of Capital Appreciation
and in American Value's Prospectus attached hereto and incorporated herein by
reference.
THE REORGANIZATION
THE PROPOSAL
The Board of Trustees of Capital Appreciation, including the Independent
Trustees, having reviewed the financial position of Capital Appreciation and
the prospects for achieving economies of scale through the Reorganization and
having determined that the Reorganization is in the best interests of Capital
Appreciation and its Shareholders and that the interests of Shareholders will
not be diluted as a result thereof, recommends approval of the Reorganization
by Shareholders of Capital Appreciation.
THE BOARD'S CONSIDERATION
At a meeting held on October 28, 1998, the Board, including all of the
Independent Trustees, unanimously approved the Reorganization Agreement and
determined to recommend that Shareholders approve the Reorganization Agreement.
In reaching this decision, the Board made an extensive inquiry into a number of
factors, particularly the comparative expenses currently incurred in the
operations of Capital Appreciation and American Value. The Board also
considered other factors, including, but not limited to: the general
compatibility of the investment objectives, policies, restrictions and
portfolios of Capital Appreciation and American Value; the terms and conditions
of the Reorganization which would affect the price of shares to be issued in
the Reorganization; the tax-free nature of the Reorganization; and any direct
or indirect costs to be incurred by Capital Appreciation and American Value in
connection with the Reorganization.
In recommending the Reorganization to Shareholders, the Board of Capital
Appreciation considered that the Reorganization would have the following
benefits to Shareholders:
1. Once the Reorganization is consummated, the expenses which would be
borne by shareholders of each class of the "combined fund" should be lower on a
percentage basis than the expenses per share of each corresponding class of
Capital Appreciation. In part, this is because the estimated current rate of
the investment management fee to be paid by the surviving American Value (0.49%
of average daily net assets) would be lower than the rate of the investment
management fee currently paid by Capital Appreciation (0.75% of average daily
12
<PAGE>
net assets). Furthermore, to the extent that the Reorganization would result in
Shareholders becoming shareholders of a combined larger fund, further economies
of scale could be achieved since various fixed expenses (e.g., auditing and
legal) can be spread over a larger number of shares. The Board noted that the
expense ratio for each class of Capital Appreciation was higher (for its fiscal
year ended November 30, 1997) than the expense ratio for each corresponding
class of American Value (for its fiscal year ended December 31, 1997).
2. Shareholders would have a continued participation in a diversified
portfolio of common stocks through investment in American Value.
3. The Reorganization will constitute a tax-free reorganization for
Federal income tax purposes, and no gain or loss will be recognized by Capital
Appreciation or its Shareholders for Federal income tax purposes as a result of
transactions included in the Reorganization.
4. The Board also took into consideration that absent the Reorganization,
American Value will continue to compete for investor funds directly with
Capital Appreciation. The Reorganization should allow for more concentrated
selling efforts to the benefit of both Capital Appreciation and American Value
shareholders and avoid the inefficiencies associated with the operation and
distribution of two similar funds through the same sales organization.
The Board of Trustees of American Value, including a majority of the
Independent Trustees of American Value, also have determined that the
Reorganization is in the best interests of American Value and its shareholders
and that the interests of existing shareholders of American Value will not be
diluted as a result thereof. The transaction will enable American Value to
acquire investment securities which are consistent with American Value's
investment objective, without the brokerage costs attendant to the purchase of
such securities in the market. Also, the addition of assets to American Value's
portfolio may result in a further reduction in the investment management fee
resulting from the addition of more assets at a lower breakpoint rate in the
management fee schedule. Furthermore, like the shareholders of Capital
Appreciation, the shareholders of American Value may also realize an intangible
benefit in having the Morgan Stanley Dean Witter sales organization concentrate
its selling efforts on one rather than two similar funds, which may result in
further economies of scale. Finally, the Board considered that even if the
benefits enumerated above are not realized, the costs to the Fund are
sufficiently minor to warrant taking the opportunity to realize those benefits.
With respect to the Class B shares, the Board recognized that, although the
formula for calculating 12b-1 fees is similar for both funds, the application
of the formula results in lower annual fees for American Value than for Capital
Appreciation and that combining the two funds would, at least initially, result
in somewhat higher 12b-1 fees for the combined Fund than American Value's
current 12b-1 fee, as noted above under "Synopsis -- Fee Table." The Board
believes, however, that this relatively minor disadvantage would be offset by
the other benefits of the Reorganization.
THE REORGANIZATION AGREEMENT
The terms and conditions under which the Reorganization would be
consummated, as summarized below, are set forth in the Reorganization
Agreement. This summary is qualified in its entirety by reference to the
Reorganization Agreement, a copy of which is attached as Exhibit A to this
Proxy Statement and Prospectus.
The Reorganization Agreement provides that (i) Capital Appreciation will
transfer all of its assets, including portfolio securities, cash (other than
cash amounts retained by Capital Appreciation as a "Cash Reserve" in the amount
sufficient to discharge its liabilities not discharged prior to the Valuation
Date (as defined below) and for expenses of the dissolution), cash equivalents
and receivables to American Value on the Closing Date in exchange for the
assumption by American Value of stated liabilities of Capital Appreciation,
13
<PAGE>
including all expenses, costs, charges and reserves, as reflected on an
unaudited statement of assets and liabilities of Capital Appreciation prepared
by the Treasurer of Capital Appreciation as of the Valuation Date (as defined
below) in accordance with generally accepted accounting principles consistently
applied from the prior audited period, and the delivery of the American Value
Shares; (ii) such American Value Shares would be distributed to Shareholders on
the Closing Date or as soon as practicable thereafter; (iii) Capital
Appreciation would be dissolved; and (iv) the outstanding shares of Capital
Appreciation would be canceled.
The number of American Value Shares to be delivered to Capital
Appreciation will be determined by dividing the aggregate net asset value of
each class of shares of Capital Appreciation acquired by American Value by the
net asset value per share of the corresponding class of shares of American
Value; these values will be calculated as of the close of business of the New
York Stock Exchange on the third business day following the receipt of the
requisite approval by Shareholders of the Reorganization Agreement or at such
other time as Capital Appreciation and American Value may agree (the "Valuation
Date"). As an illustration, assume that on the Valuation Date, Class B shares
of Capital Appreciation had an aggregate net asset value (not including any
Cash Reserve of Capital Appreciation) of $100,000. If the net asset value per
Class B share of American Value were $10 per share at the close of business on
the Valuation Date, the number of Class B shares American Value to be issued
would be 10,000 ($100,000 (divided by) $10). These 10,000 Class B shares of
American Value would be distributed to the former Class B shareholders of
Capital Appreciation. This example is given for illustration purposes only and
does not bear any relationship to the dollar amounts or shares expected to be
involved in the Reorganization.
On the Closing Date or as soon as practicable thereafter, Capital
Appreciation will distribute pro rata to its Shareholders of record as of the
close of business on the Valuation Date, the American Value Shares it receives.
Each Shareholder will receive the class of shares of American Value that
corresponds to the class of shares of Capital Appreciation currently held by
that Shareholder. Accordingly, the American Value Shares will be distributed as
follows: each of the Class A, Class B, Class C and Class D shares of American
Value will be distributed to holders of Class A, Class B, Class C and Class D
shares of Capital Appreciation, respectively. American Value will cause its
transfer agent to credit and confirm an appropriate number of American Value
Shares to each Shareholder. Certificates for American Value Shares will be
issued only upon written request of a Shareholder and only for whole shares,
with fractional shares credited to the name of the Shareholder on the books of
American Value. Shareholders who wish to receive certificates representing
their American Value Shares must, after receipt of their confirmations, make a
written request to American Value's transfer agent Morgan Stanley Dean Witter
Trust FSB, Harborside Financial Center, Jersey City, New Jersey 07311.
Shareholders of Capital Appreciation holding their shares in certificate form
will be asked to surrender such certificates in connection with the
Reorganization. Shareholders who do not surrender their certificates prior to
the Closing Date will still receive their shares of American Value; however,
such Shareholders will not be able to redeem, transfer or exchange the American
Value Shares received until the old certificates have been surrendered.
The Closing Date will be the next business day following the Valuation
Date. The consummation of the Reorganization is contingent upon the approval of
the Reorganization by the Shareholders and the receipt of the other opinions
and certificates set forth in Sections 6, 7 and 8 of the Reorganization
Agreement and the occurrence of the events described in those Sections, certain
of which may be waived by Capital Appreciation or American Value. The
Reorganization Agreement may be amended in any mutually agreeable manner. All
expenses of this solicitation, including the cost of preparing and mailing this
Proxy Statement and Prospectus, will be borne by Capital Appreciation, which
expenses are expected to approximate $182,000. Capital Appreciation and
American Value will bear all of their respective other expenses associated with
the Reorganization.
14
<PAGE>
The Reorganization Agreement may be terminated and the Reorganization
abandoned at any time, before or after approval by Shareholders or by mutual
consent of Capital Appreciation and American Value. In addition, either party
may terminate the Reorganization Agreement upon the occurrence of a material
breach of the Reorganization Agreement by the other party or if, by May 31,
1999, any condition set forth in the Reorganization Agreement has not been
fulfilled or waived by the party entitled to its benefits.
Under the Reorganization Agreement, within one year after the Closing
Date, Capital Appreciation shall: either pay or make provision for all of its
liabilities and distribute any remaining amount of the Cash Reserve (after
paying or making provision for such liabilities and the estimated cost of
making the distribution) to former shareholders of Capital Appreciation that
received American Value Shares. Capital Appreciation shall be dissolved and
deregistered as an investment company promptly following the distributions of
shares of American Value to Shareholders of record of Capital Appreciation.
The effect of the Reorganization is that Shareholders who vote their
shares in favor of the Reorganization Agreement are electing to sell their
shares of Capital Appreciation (at net asset value on the Valuation Date
calculated after subtracting any Cash Reserve) and reinvest the proceeds in
American Value Shares at net asset value and without recognition of taxable
gain or loss for Federal income tax purposes. See "Tax Aspects of the
Reorganization" below. As noted in "Tax Aspects of the Reorganization" below,
if Capital Appreciation recognizes net gain from the sale of securities prior
to the Closing Date, such gain, to the extent not offset by capital loss
carryforwards, will be distributed to Shareholders prior to the Closing Date
and will be taxable to Shareholders as capital gain.
Shareholders will continue to be able to redeem their shares of Capital
Appreciation at net asset value next determined after receipt of the redemption
request (subject to any applicable CDSC) until the close of business on the
business day next preceding the Closing Date. Redemption requests received by
Capital Appreciation thereafter will be treated as requests for redemption of
shares of American Value.
TAX ASPECTS OF THE REORGANIZATION
At least one but not more than 20 business days prior to the Valuation
Date, Capital Appreciation will declare and pay a dividend or dividends which,
together with all previous such dividends, will have the effect of distributing
to Shareholders all of Capital Appreciation's investment company taxable income
for all periods since the inception of Capital Appreciation through and
including the Valuation Date (computed without regard to any dividends paid
deduction), and all of Capital Appreciation's net capital gain, if any,
realized in such periods (after reduction for any capital loss carryforward).
The Reorganization is intended to qualify for Federal income tax purposes
as a tax-free reorganization under Section 368(a)(1)(C) of the Internal Revenue
Code of 1986, as amended (the "Code"). Capital Appreciation and American Value
have represented that, to their best knowledge, there is no plan or intention
by Shareholders to redeem, sell, exchange or otherwise dispose of a number of
American Value Shares received in the transaction that would reduce
Shareholders' ownership of American Value Shares to a number of shares having a
value, as of the Closing Date, of less than 50% of the value of all of the
formerly outstanding Capital Appreciation shares as of the same date. Capital
Appreciation and American Value have each further represented that, as of the
Closing Date, Capital Appreciation and American Value will qualify as regulated
investment companies.
As a condition to the Reorganization, Capital Appreciation and American
Value will receive an opinion of Gordon Altman Butowsky Weitzen Shalov & Wein
that, based on certain assumptions, facts, the terms of the Reorganization
Agreement and additional representations set forth in the Reorganization
Agreement or provided by Capital Appreciation and American Value:
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<PAGE>
1. The transfer of substantially all of Capital Appreciation's assets in
exchange for the American Value Shares and the assumption by American Value of
certain stated liabilities of Capital Appreciation followed by the distribution
by Capital Appreciation of the American Value Shares to Shareholders in
exchange for their Capital Appreciation shares will constitute a
"reorganization" within the meaning of Section 368(a)(1)(C) of the Code, and
Capital Appreciation and American Value will each be a "party to a
reorganization" within the meaning of Section 368(b) of the Code;
2. No gain or loss will be recognized by American Value upon the receipt
of the assets of Capital Appreciation solely in exchange for the American Value
Shares and the assumption by American Value of the stated liabilities of
Capital Appreciation;
3. No gain or loss will be recognized by Capital Appreciation upon the
transfer of the assets of Capital Appreciation to American Value in exchange
for the American Value Shares and the assumption by American Value of the
stated liabilities or upon the distribution of American Value Shares to
Shareholders in exchange for their Capital Appreciation shares;
4. No gain or loss will be recognized by Shareholders upon the exchange of
the shares of Capital Appreciation for the American Value Shares;
5. The aggregate tax basis for the American Value Shares received by each
of the Shareholders pursuant to the Reorganization will be the same as the
aggregate tax basis of the shares in Capital Appreciation held by each such
Shareholder immediately prior to the Reorganization;
6. The holding period of the American Value Shares to be received by each
Shareholder will include the period during which the shares in Capital
Appreciation surrendered in exchange therefor were held (provided such shares
in Capital Appreciation were held as capital assets on the date of the
Reorganization);
7. The tax basis of the assets of Capital Appreciation acquired by
American Value will be the same as the tax basis of such assets to Capital
Appreciation immediately prior to the Reorganization; and
8. The holding period of the assets of Capital Appreciation in the hands
of American Value will include the period during which those assets were held
by Capital Appreciation.
SHAREHOLDERS SHOULD CONSULT THEIR TAX ADVISORS REGARDING THE EFFECT, IF
ANY, OF THE PROPOSED TRANSACTION IN LIGHT OF THEIR INDIVIDUAL CIRCUMSTANCES.
BECAUSE THE FOREGOING DISCUSSION ONLY RELATES TO THE FEDERAL INCOME TAX
CONSEQUENCES OF THE PROPOSED TRANSACTION, SHAREHOLDERS SHOULD ALSO CONSULT
THEIR TAX ADVISORS AS TO STATE AND LOCAL TAX CONSEQUENCES, IF ANY, OF THE
PROPOSED TRANSACTION.
DESCRIPTION OF SHARES
American Value shares to be issued pursuant to the Reorganization
Agreement will, when issued, be fully paid and non-assessable by American Value
and transferable without restrictions and will have no preemptive rights. Class
B shares of American Value, like Class B shares of Capital Appreciation, have a
conversion feature pursuant to which approximately ten (10) years after the
date of the original purchase of such shares, the shares will convert
automatically to Class A shares, based on the relative net asset values of the
two classes. For greater details regarding the conversion feature, including
the method by which the 10 year period is calculated and the treatment of
reinvested dividends, see "Purchase of Fund Shares" in each fund's Prospectus.
CAPITALIZATION TABLE (UNAUDITED)
The following table sets forth the capitalization of American Value and
Capital Appreciation as of September 30, 1998 and on a pro forma combined basis
as if the Reorganization had occurred on that date:
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<TABLE>
<CAPTION>
NET ASSET
SHARES VALUE
NET ASSETS OUTSTANDING PER SHARE
----------------- ------------- ----------
<S> <C> <C> <C>
CLASS A
- -----------------------------------
Capital Appreciation .............. $ 728,646 66,844 $ 10.90
American Value .................... $ 76,168,332 2,389,336 $ 31.88
Combined Fund (pro forma) ......... $ 76,896,978 2,412,192 $ 31.88
CLASS B
- ------------------------------------
Capital Appreciation .............. $ 214,589,890 19,879,095 $ 10.79
American Value .................... $4,722,895,303 149,184,537 $ 31.66
Combined Fund (pro forma) ......... $4,937,485,193 155,962,487 $ 31.66
CLASS C
- ------------------------------------
Capital Appreciation .............. $ 1,332,961 123,472 $ 10.80
American Value .................... $ 38,710,697 1,225,890 $ 31.58
Combined Fund (pro forma) ......... $ 40,043,658 1,268,099 $ 31.58
CLASS D
- ------------------------------------
Capital Appreciation .............. $ 193,368 17,658 $ 10.95
American Value .................... $ 110,067,180 3,441,655 $ 31.98
Combined Fund (pro forma) ......... $ 110,260,548 3,447,702 $ 31.98
TOTAL CLASS A, B, C, D
- ------------------------------------
Capital Appreciation .............. $ 216,844,865 20,087,069 --
American Value .................... $4,997,841,512 156,231,418 --
Combined Fund (pro forma) ......... $5,164,686,377 163,090,480 --
</TABLE>
APPRAISAL RIGHTS
Shareholders will have no appraisal rights in connection with the
Reorganization.
COMPARISON OF INVESTMENT OBJECTIVES, POLICIES AND RESTRICTIONS
INVESTMENT OBJECTIVES AND POLICIES
Capital Appreciation and American Value each are funds which have similar
although not identical investment objectives and policies. The investment
objective of Capital Appreciation is long-term capital appreciation. The
investment objective of American Value is long-term capital growth consistent
with an effort to reduce volatility. Both funds seek to achieve their
objectives by investing principally in a diversified portfolio of common stocks
in accordance with their respective investment strategies set forth below.
American Value utilizes an investment process that places primary emphasis
on seeking to identify industries, rather than individual companies, as
prospects for capital appreciation. The Investment Manager seeks to invest the
assets of American Value in those industries that, at the time of investment,
are
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attractively valued given their above average relative earnings growth
potential at that time and, therefore, the fund is typically over-weighted in
those sectors deemed to be attractive given their potential for above average
earnings growth. After selection of the fund's target industries, specific
company investments are selected. In this process, the Investment Manager seeks
to identify companies whose prospects are deemed attractive on the basis of an
evaluation of valuation screens and prospective company fundamentals. Following
selection of the fund's specific investments, the Investment Manager will
attempt to allocate the assets of the fund so as to reduce the volatility of
its portfolio. In doing so, American Value may hold a portion of its portfolio
in fixed-income securities (including zero coupon securities) in an effort to
moderate extremes of price fluctuations. American Value may invest up to 35% of
its portfolio in common stocks of non-U.S. companies, in companies whose
industries have not been determined to be attractively valued or moderately
attractively valued by the Investment Manager, and in convertible debt
securities and warrants, convertible preferred securities, U.S. Government
securities (securities issued or guaranteed as to principal and interest by the
United States or its agencies and instrumentalities) and investment grade
corporate debt securities when, in the opinion of the Investment Manager, the
projected total return on such securities is equal to or greater than the
expected total return on common stocks, or when such holdings might be expected
to reduce the volatility of the portfolio, and in money market instruments
under any one or more of the following circumstances: (i) pending investment of
proceeds of the sale of fund shares or of portfolio securities; (ii) pending
settlement of purchases of portfolio securities; or (iii) to maintain liquidity
for the purpose of meeting anticipated redemptions. Greater than 35% of the
fund's total assets may be invested in money market instruments to maintain,
temporarily, a "defensive" posture when, in the opinion of the Investment
Manager, it is advisable to do so because of economic or market conditions.
Capital Appreciation seeks to invest its assets in common stocks of
primarily U.S. companies that, in the opinion of the Investment Manager, offer
the potential for either superior earnings growth and/or appear to be
undervalued. The fund primarily looks for quality businesses with an investment
outlook based upon a mix of growth potential, financial strength and
fundamental value. The Investment Manager bases the selection of stocks for the
fund's portfolio on research and analysis, taking into account, among other
factors, a company's price/earnings ratio (that is whether the current stock
price appears undervalued in relation to earnings, projected cash flow, or
asset value per share; or the price-to-earnings ratio is attractive relative to
the company's underlying earnings growth rate), growth in sales, market-to-book
ratio, the quality of a company's balance sheet, sales-per-share and
profitability in order to determine whether the current market valuation is
less than the Investment Manager's view of a company's intrinsic value. The
Investment Manager also considers characteristics such as capable management,
attractive business niches, pricing flexibility, sound financial and accounting
practices and a demonstrated ability or prospects to consistently grow
revenues, earnings and cash flow as well as the possibility of increased
investor attention, asset sales, a new product/innovation, or a change in
management which may cause the stock's price to rise.
The Investment Manager has no general criteria as to asset size, earnings
or industry type and the fund's holdings are generally widely diversified by
industry and company and, under most circumstances, at the time of initial
purchase, the average position will be less than 1.5% of the fund's net assets.
Up to 35% of Capital Appreciation's total assets may be invested in debt
or preferred equity securities convertible into or exchangeable for equity
securities, rights and warrants, and the fund may also invest in other debt
securities without regard to quality or rating, if in the opinion of the
Investment Manager such securities meet the investment criteria of the fund.
The fund will not purchase a non-investment grade debt security (or junk bond)
if, immediately after such purchase, the fund would have more than 5% of its
total assets invested in such securities. During periods which, in the opinion
of the Investment Manager, market conditions warrant a reduction of some or all
of the fund's securities holdings, the fund may adopt a temporary "defensive"
posture in which greater than 35% of its total assets are invested in money
market instruments or cash.
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<PAGE>
Both funds may invest their assets in foreign securities, including
securities of foreign issuers denominated in foreign currencies or in the form
of American Depository Receipts ("ADRs"); American Value may invest up to 35%
of its total assets in foreign securities while Capital Appreciation may not
invest more than 10% of its total assets in such foreign securities.
Additionally, both funds may enter into forward foreign currency exchange
contracts in connection with its foreign securities investments as a hedge
against fluctuations in future foreign exchange rates.
Both Capital Appreciation and American Value may engage in options and
futures transactions. Capital Appreciation may purchase and sell (write)
options on portfolio securities denominated in U.S. dollars and foreign
currencies and may purchase and sell (write) options on the U.S. dollar and
foreign currencies which are or may be in the future listed on U.S. and foreign
securities exchanges or are written in over-the-counter transactions ("OTC
options"). Capital Appreciation may write covered call options on portfolio
securities and currencies without limit, in order to hedge against the decline
in the value of a security or currency in which such security is denominated
and to close out long call option positions. American Value may purchase and
sell (write) options on debt and equity securities which are listed on
Exchanges or which are OTC options and may only write covered call options in
an amount up to, but not exceeding in the aggregate, 25% of the value of its
total assets. Both funds also may purchase listed and OTC call and put options
in amounts equaling up to 5% (Capital Appreciation) and 10% (American Value) of
their respective total assets and American Value may invest up to 5% of its
total assets in stock index options. Both funds may purchase call and put
options to close out covered call or written put positions, as applicable, or
to protect the value of the relevant security. Capital Appreciation may
purchase and sell futures contracts that are currently traded, or may in the
future be traded, on U.S. and foreign commodity exchanges on underlying
portfolio securities, on any currency ("currency" futures), as well as on U.S.
and foreign fixed-income securities ("interest rate" futures) and on such
indexes of U.S. or foreign equity or fixed-income securities as may exist or
come into being ("index" futures). American Value may purchase and sell
interest rate and stock index futures contracts that are traded on U.S.
commodity exchanges on such underlying securities as U.S. Treasury securities,
GNMA Certificates, and indexes such as the S&P 500 Index, the New York Stock
Exchange Composite Index and the Moody's Investment-Grade Corporate Bond Index.
Both American Value and Capital Appreciation may (i) purchase securities
on a when-issued or delayed delivery basis, (ii) purchase or sell securities on
a forward commitment basis, (iii) purchase securities on a "when, as and if
issued" basis, (iv) enter into repurchase agreements subject to certain
procedures designed to minimize risks associated with such agreements, (v)
purchase rights and warrants, (vi) invest in zero coupon securities and (vii)
invest up to 5% of their respective total assets in securities which are
subject to restrictions on resale because they have not been registered under
the Securities Act of 1933, as amended, or which are not otherwise readily
marketable (both funds do not include Rule 144A securities in this 5%
limitation). Capital Appreciation may also enter into reverse repurchase
agreements and dollar rolls.
Additionally, both American Value and Capital Appreciation may invest in
real estate investment trusts.
The investment policies of both Capital Appreciation and American Value
are not fundamental and may be changed by their respective Boards. The
foregoing discussion is a summary of the principal differences and similarities
between the investment policies of the funds. For a more complete discussion of
each fund's policies, see "Investment Objective and Policies" in each fund's
Prospectus and "Investment Practices and Policies" in each fund's Statement of
Additional Information.
INVESTMENT RESTRICTIONS
The investment restrictions adopted by Capital Appreciation and American
Value as fundamental policies are substantially similar and are summarized
under the caption "Investment Restrictions" in their respective
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Prospectuses and Statements of Additional Information. A fundamental investment
restriction cannot be changed without the vote of the majority of the
outstanding voting securities of a fund, as defined in the 1940 Act. The
material differences are as follows: (a) Capital Appreciation has a fundamental
restriction that it may not invest more than 5% of the value of its total
assets in the securities of issuers (other than obligations issued or
guaranteed by the U.S. Government, its agencies or instrumentalities) having a
record, together with predecessors, of less than three years of continuous
operation; American Value has no such restriction; (b) Capital Appreciation may
not, 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; American Value
has a similar restriction with respect to 100% of its total assets; (c)
American Value may not purchase securities of other investment companies except
in connection with a merger, consolidation, reorganization or acquisition of
assets; Capital Appreciation carves out an additional exception for purchases
complying with Section 12(d) of the 1940 Act; and (d) both funds are prohibited
from borrowing money except from a bank for temporary or emergency purposes in
amounts not exceeding 5% of their respective total assets; however, Capital
Appreication carves out an additional exception for reverse repurchase
agreements and dollar rolls subject to this 5% limitation.
In addition, American Value has a fundamental restriction that it may not
invest in securities of any issuer if, in the exercise of reasonable diligence,
the fund has determined that any officer or trustee of the fund or of the
fund's investment manager owns more than 1/2 of 1% of the outstanding
securities of such issuer, and such officers and trustees who own more than 1/2
of 1% own in the aggregate more than 5% of the outstanding securities of such
issuer; Capital Appreciation has no such limitation.
ADDITIONAL INFORMATION ABOUT CAPITAL APPRECIATION
AND AMERICAN VALUE
GENERAL
For a discussion of the organization and operation of American Value and
Capital Appreciation, see "The Fund and its Management," "Investment Objective
and Policies," "Investment Restrictions" and "Prospectus Summary" in, and the
cover page of, their respective Prospectuses.
FINANCIAL INFORMATION
For certain financial information about American Value and Capital
Appreciation, see "Financial Highlights" and "Performance Information" in their
respective Prospectuses.
MANAGEMENT
For information about the respective Board of Trustees, Investment
Manager, and the Distributor of American Value and Capital Appreciation, see
"The Fund and its Management" and "Investment Objective and Policies" in, and
on the back cover of, their respective Prospectuses.
DESCRIPTION OF SECURITIES AND SHAREHOLDER INQUIRIES
For a description of the nature and most significant attributes of shares
of Capital Appreciation and American Value, and information regarding
shareholder inquiries, see "Additional Information" in their respective
Prospectuses.
DIVIDENDS, DISTRIBUTIONS AND TAXES
For a discussion of American Value's and Capital Appreciation's policies
with respect to dividends, distributions and taxes, see "Dividends,
Distributions and Taxes" in their respective Prospectuses as well as the
discussion herein under "Synopsis -- Purchases, Exchanges and Redemptions."
20
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PURCHASES, REPURCHASES AND REDEMPTIONS
For a discussion of how American Value's and Capital Appreciation's shares
may be purchased, repurchased and redeemed, see "Purchase of Fund Shares,"
"Shareholder Services" and "Redemptions and Repurchases" in their respective
Prospectuses.
MANAGEMENT'S DISCUSSION OF FUND PERFORMANCE
For a discussion of American Value's performance, see management's letter
to shareholders in its Annual Report for its fiscal year ended December 31,
1997 and in its unaudited Semi-Annual Report for the six months ended June 30,
1998 accompanying this Proxy Statement and Prospectus. For a discussion of the
performance of Capital Appreciation, see its Annual Report for its fiscal year
ended November 30, 1997 and its unaudited Semi-Annual Report for the six months
ended May 31, 1998.
FINANCIAL STATEMENTS AND EXPERTS
The financial statements of American Value, for the year ended December
31, 1997, and Capital Appreciation, for the year ended November 30, 1997 that
are incorporated by reference in the Statement of Additional Information
relating to the Registration Statement on Form N-14 of which this Proxy
Statement and Prospectus forms a part, have been audited by
PricewaterhouseCoopers LLP, independent accountants. The financial statements
have been incorporated by reference in reliance upon such reports given upon
the authority of PricewaterhouseCoopers LLP as experts in accounting and
auditing.
LEGAL MATTERS
Certain legal matters concerning the issuance of shares of American Value
will be passed upon by Gordon Altman Butowsky Weitzen Shalov & Wein, New York,
New York. Such firm will rely on Lane Altman & Owens as to matters of
Massachusetts law.
AVAILABLE INFORMATION
Additional information about Capital Appreciation and American Value is
available, as applicable, in the following documents which are incorporated
herein by reference: (i) American Value's Prospectus dated May 1, 1998, As
Revised August 21, 1998, attached this Proxy Statement and Prospectus, which
Prospectus forms a part of Post-Effective Amendment No. 22 to American Value's
Registration Statement on Form N-1A (File Nos. 2-66269; 811-2978); (ii)
American Value's Annual Report for its fiscal year ended December 31, 1997 and
its unaudited Semi-Annual Report for the six months ended June 30, 1998,
accompanying this Proxy Statement and Prospectus; (iii) Capital Appreciation's
Prospectus dated January 29, 1998, which Prospectus forms a part of
Post-Effective Amendment No. 4 to Capital Appreciation's Registration Statement
on Form N-1A (File Nos. 33-61511; 811-7333); and (iv) Capital Appreciation's
Annual Report for its fiscal year ended November 30, 1997 and its unaudited
Semi-Annual Report for its six months ended May 31, 1997. The foregoing
documents may be obtained without charge by calling (212) 392-2550 or (800)
869-NEWS (toll-free).
Capital Appreciation and American Value are subject to the informational
requirements of the Securities Exchange Act of 1934, as amended, and in
accordance therewith, file reports and other information with the Commission.
Proxy material, reports and other information about Capital Appreciation and
American Value which are of public record can be inspected and copied at public
reference facilities maintained by the Commission at Room 1204, Judiciary
Plaza, 450 Fifth Street, NW, Washington, D.C. 20549 and certain of its regional
offices, and copies of such materials can be obtained at prescribed rates from
the Public Reference Branch, Office of Consumer Affairs and Information
Services, Securities and Exchange Commission, Washington, D.C. 20549.
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OTHER BUSINESS
Management of Capital Appreciation knows of no business other than the
matters specified above which will be presented at the Meeting. Since matters
not known at the time of the solicitation may come before the Meeting, the
proxy as solicited confers discretionary authority with respect to such matters
as properly come before the Meeting, including any adjournment or adjournments
thereof, and it is the intention of the persons named as attorneys-in-fact in
the proxy to vote this proxy in accordance with their judgment on such matters.
By Order of the Board of Trustees
Barry Fink,
Secretary
December 4, 1998
22
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EXHIBIT A
AGREEMENT AND PLAN OF REORGANIZATION
THIS AGREEMENT AND PLAN OF REORGANIZATION ("Agreement") is made as of this
28th day of October, 1998, by and between MORGAN STANLEY DEAN WITTER AMERICAN
VALUE FUND, a Massachusetts business trust ("American Value") and MORGAN
STANLEY DEAN WITTER CAPITAL APPRECIATION FUND, a Massachusetts business trust
("Capital Appreciation").
This Agreement is intended to be and is adopted as a "plan of
reorganization" within the meaning of Treas. Reg. 1.368-2(g), for a
reorganization under Section 368(a)(1) of the Internal Revenue Code of 1986, as
amended (the "Code"). The reorganization ("Reorganization") will consist of the
transfer to American Value of substantially all of the assets of Capital
Appreciation in exchange for the assumption by American Value of all stated
liabilities of Capital Appreciation and the issuance by American Value of
shares of beneficial interest, par value $0.01 per share (the "American Value
Shares"), to be distributed, after the Closing Date hereinafter referred to, to
the shareholders of Capital Appreciation in liquidation of Capital Appreciation
as provided herein, all upon the terms and conditions hereinafter set forth in
this Agreement.
In consideration of the premises and of the covenants and agreements
hereinafter set forth, the parties hereto covenant and agree as follows:
1. THE REORGANIZATION AND LIQUIDATION OF CAPITAL APPRECIATION
1.1 Subject to the terms and conditions herein set forth and on the basis
of the representations and warranties contained herein, Capital Appreciation
agrees to assign, deliver and otherwise transfer the Capital Appreciation
Assets (as defined in paragraph 1.2) to American Value and American Value
agrees in exchange therefor to assume all of Capital Appreciation's stated
liabilities on the Closing Date as set forth in paragraph 1.3(a) and to deliver
to Capital Appreciation the number of American Value Shares, including
fractional American Value Shares, determined in the manner set forth in
paragraph 2.3. Such transactions shall take place at the closing provided for
in paragraph 3.1 ("Closing").
1.2 (a) The "Capital Appreciation Assets" shall consist of all property,
including without limitation, all cash (other than the "Cash Reserve" (as
defined in paragraph 1.3(b)), cash equivalents, securities and dividend and
interest receivables owned by Capital Appreciation, and any deferred or prepaid
expenses shown as an asset on Capital Appreciation's books on the Valuation
Date.
(b) On or prior to the Valuation Date, Capital Appreciation will provide
American Value with a list of all of Capital Appreciation's assets to be
assigned, delivered and otherwise transferred to American Value and of the
stated liabilities to be assumed by American Value pursuant to this Agreement.
Capital Appreciation reserves the right to sell any of the securities on such
list but will not, without the prior approval of American Value, acquire any
additional securities other than securities of the type in which American Value
is permitted to invest and in amounts agreed to in writing by American Value.
American Value will, within a reasonable time prior to the Valuation Date,
furnish Capital Appreciation with a statement of American Value's investment
objectives, policies and restrictions and a list of the securities, if any, on
the list referred to in the first sentence of this paragraph that do not
conform to American Value's investment objective, policies and restrictions. In
the event that Capital Appreciation holds any investments that American Value
is not permitted to hold, Capital Appreciation will dispose of such securities
on or prior to the Valuation Date. In addition, if it is determined that the
portfolios of Capital Appreciation and American Value, when aggregated, would
contain investments exceeding certain percentage limitations imposed upon
American Value with respect to such investments, Capital Appreciation if
requested by American Value will, on or prior to the Valuation Date,
A-1
<PAGE>
dispose of and/or reinvest a sufficient amount of such investments as may be
necessary to avoid violating such limitations as of the Closing Date (as
defined in paragraph 3.1).
1.3 (a) Capital Appreciation will endeavor to discharge all of its
liabilities and obligations on or prior to the Valuation Date. American Value
will assume all stated liabilities, which includes, without limitation, all
expenses, costs, charges and reserves reflected on an unaudited Statement of
Assets and Liabilities of Capital Appreciation prepared by the Treasurer of
Capital Appreciation as of the Valuation Date in accordance with generally
accepted accounting principles consistently applied from the prior audited
period.
(b) On the Valuation Date, Capital Appreciation may establish a cash
reserve, which shall not exceed 5% of Capital Appreciation's net assets as of
the close of business on the Valuation Date ("Cash Reserve") to be retained by
Capital Appreciation and used for the payment of its liabilities not discharged
prior to the Valuation Date and for the expenses of dissolution.
1.4 In order for Capital Appreciation to comply with Section 852(a)(1) of
the Code and to avoid having any investment company taxable income or net
capital gain (as defined in Sections 852(b)(2) and 1222(11) of the Code,
respectively) in the short taxable year ending with its dissolution, Capital
Appreciation will on or before the Valuation Date (a) declare a dividend in an
amount large enough so that it will have declared dividends of all of its
investment company taxable income and net capital gain, if any, for such
taxable year (determined without regard to any deduction for dividends paid)
and (b) distribute such dividend.
1.5 On the Closing Date or as soon as practicable thereafter, Capital
Appreciation will distribute American Value Shares received by Capital
Appreciation pursuant to paragraph 1.1 pro rata to its shareholders of record
determined as of the close of business on the Valuation Date ("Capital
Appreciation Shareholders"). Each Capital Appreciation Shareholder will receive
the class of shares of American Value that corresponds to the class of shares
of Capital Appreciation currently held by that Capital Appreciation
Shareholder. Accordingly, the American Value Shares will be distributed as
follows: each of the Class A, Class B, Class C and Class D shares of American
Value will be distributed to holders of Class A, Class B, Class C and Class D
shares of Capital Appreciation, respectively. Such distribution will be
accomplished by an instruction, signed by Capital Appreciation's Secretary, to
transfer American Value Shares then credited to Capital Appreciation's account
on the books of American Value to open accounts on the books of American Value
in the names of the Capital Appreciation Shareholders and representing the
respective pro rata number of American Value Shares due such Capital
Appreciation Shareholders. All issued and outstanding shares of Capital
Appreciation simultaneously will be canceled on Capital Appreciation's books;
however, share certificates representing interests in Capital Appreciation will
represent a number of American Value Shares after the Closing Date as
determined in accordance with paragraph 2.3. American Value will issue
certificates representing American Value Shares in connection with such
exchange only upon the written request of a Capital Appreciation Shareholder.
1.6 Ownership of American Value Shares will be shown on the books of
American Value's transfer agent. American Value Shares will be issued in the
manner described in American Value's current Prospectus and Statement of
Additional Information.
1.7 Any transfer taxes payable upon issuance of American Value Shares in a
name other than the registered holder of American Value Shares on Capital
Appreciation's books as of the close of business on the Valuation Date shall,
as a condition of such issuance and transfer, be paid by the person to whom
American Value Shares are to be issued and transferred.
1.8 Any reporting responsibility of Capital Appreciation is and shall
remain the responsibility of Capital Appreciation up to and including the date
on which Capital Appreciation is dissolved and deregistered pursuant to
paragraph 1.9.
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1.9 Within one year after the Closing Date, Capital Appreciation shall pay
or make provision for the payment of all its liabilities and taxes, and
distribute to the shareholders of Capital Appreciation as of the close of
business on the Valuation Date any remaining amount of the Cash Reserve (as
reduced by the estimated cost of distributing it to shareholders). Capital
Appreciation shall be dissolved as a Massachusetts business trust and
deregistered as an investment company under the Investment Company Act of 1940,
as amended ("1940 Act"), promptly following the making of all distributions
pursuant to paragraph 1.5.
1.10 Copies of all books and records maintained on behalf of Capital
Appreciation in connection with its obligations under the 1940 Act, the Code,
state blue sky laws or otherwise in connection with this Agreement will
promptly after the Closing be delivered to officers of American Value or their
designee and American Value or its designee shall comply with applicable record
retention requirements to which Capital Appreciation is subject under the 1940
Act.
2. VALUATION
2.1 The value of the Capital Appreciation Assets shall be the value of
such assets computed as of 4:00 p.m. on the New York Stock Exchange on the
third business day following the receipt of the requisite approval by
shareholders of Capital Appreciation of this Agreement or at such time on such
earlier or later date after such approval as may be mutually agreed upon in
writing (such time and date being hereinafter called the "Valuation Date"),
using the valuation procedures set forth in American Value's then current
Prospectus and Statement of Additional Information.
2.2 The net asset value of an American Value Share shall be the net asset
value per share computed on the Valuation Date, using the valuation procedures
set forth in American Value's then current Prospectus and Statement of
Additional Information.
2.3 The number of American Value Shares (including fractional shares, if
any) to be issued hereunder shall be determined, with respect to each class, by
dividing the aggregate net asset value of each class of Capital Appreciation
shares (determined in accordance with paragraph 2.1) by the net asset value per
share of the corresponding class of shares of American Value (determined in
accordance with paragraph 2.2). For purposes of this paragraph, the aggregate
net asset value of each class of shares of Capital Appreciation shall not
include the amount of the Cash Reserve.
2.4 All computations of value shall be made by Morgan Stanley Dean Witter
Services Company Inc. ("MSDW Services") in accordance with its regular practice
in pricing American Value. American Value shall cause MSDW Services to deliver
a copy of its valuation report at the Closing.
3. CLOSING AND CLOSING DATE
3.1 The Closing shall take place on the next business day following the
Valuation Date (the "Closing Date"). The Closing shall be held as of 9:00 a.m.
Eastern time, or at such other time as the parties may agree. The Closing shall
be held in a location mutually agreeable to the parties hereto. All acts taking
place at the Closing shall be deemed to take place simultaneously as of 9:00
a.m. Eastern time on the Closing Date unless otherwise provided.
3.2 Portfolio securities held by Capital Appreciation and represented by a
certificate or other written instrument shall be presented by it or on its
behalf to The Bank of New York (the "Custodian"), as custodian for American
Value, for examination no later than five business days preceding the Valuation
Date. Such portfolio securities (together with any cash or other assets) shall
be delivered by Capital Appreciation to the Custodian for the account of
American Value on or before the Closing Date in conformity with applicable
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custody provisions under the 1940 Act and duly endorsed in proper form for
transfer in such condition as to constitute good delivery thereof in accordance
with the custom of brokers. The portfolio securities shall be accompanied by
all necessary Federal and state stock transfer stamps or a check for the
appropriate purchase price of such stamps. Portfolio securities and instruments
deposited with a securities depository (as defined in Rule 17f-4 under the 1940
Act) shall be delivered on or before the Closing Date by book-entry in
accordance with customary practices of such depository and the Custodian. The
cash delivered shall be in the form of a Federal Funds wire, payable to the
order of "The Bank of New York, Custodian for Morgan Stanley Dean Witter
American Value Fund."
3.3 In the event that on the Valuation Date, (a) the New York Stock
Exchange shall be closed to trading or trading thereon shall be restricted or
(b) trading or the reporting of trading on such Exchange or elsewhere shall be
disrupted so that, in the judgment of both American Value and Capital
Appreciation, accurate appraisal of the value of the net assets of American
Value or the Capital Appreciation Assets is impracticable, the Valuation Date
shall be postponed until the first business day after the day when trading
shall have been fully resumed without restriction or disruption and reporting
shall have been restored.
3.4 If requested, Capital Appreciation shall deliver to American Value or
its designee (a) at the Closing, a list, certified by its Secretary, of the
names, addresses and taxpayer identification numbers of the Capital
Appreciation Shareholders and the number and percentage ownership of
outstanding Capital Appreciation shares owned by each such Capital Appreciation
Shareholder, all as of the Valuation Date, and (b) as soon as practicable after
the Closing, all original documentation (including Internal Revenue Service
forms, certificates, certifications and correspondence) relating to the Capital
Appreciation Shareholders' taxpayer identification numbers and their liability
for or exemption from back-up withholding. American Value shall issue and
deliver to such Secretary a confirmation evidencing delivery of American Value
Shares to be credited on the Closing Date to Capital Appreciation or provide
evidence satisfactory to Capital Appreciation that such American Value Shares
have been credited to Capital Appreciation's account on the books of American
Value. At the Closing, each party shall deliver to the other such bills of
sale, checks, assignments, share certificates, if any, receipts or other
documents as such other party or its counsel may reasonably request.
4. COVENANTS OF AMERICAN VALUE AND CAPITAL APPRECIATION
4.1 Except as otherwise expressly provided herein with respect to Capital
Appreciation, American Value and Capital Appreciation each will operate its
business in the ordinary course between the date hereof and the Closing Date,
it being understood that such ordinary course of business will include
customary dividends and other distributions.
4.2 American Value will prepare and file with the Securities and Exchange
Commission ("Commission") a registration statement on Form N-14 under the
Securities Act of 1933, as amended ("1933 Act"), relating to American Value
Shares ("Registration Statement"). Capital Appreciation will provide American
Value with the Proxy Materials as described in paragraph 4.3 below, for
inclusion in the Registration Statement. Capital Appreciation will further
provide American Value with such other information and documents relating to
Capital Appreciation as are reasonably necessary for the preparation of the
Registration Statement.
4.3 Capital Appreciation will call a meeting of its shareholders to
consider and act upon this Agreement and to take all other action necessary to
obtain approval of the transactions contemplated herein. Capital Appreciation
will prepare the notice of meeting, form of proxy and proxy statement
(collectively, "Proxy Materials") to be used in connection with such meeting;
provided that American Value will furnish Capital Appreciation with its
currently effective prospectus for inclusion in the Proxy Materials and with
such other information relating to American Value as is reasonably necessary
for the preparation of the Proxy Materials.
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4.4 Capital Appreciation will assist American Value in obtaining such
information as American Value reasonably requests concerning the beneficial
ownership of Capital Appreciation shares.
4.5 Subject to the provisions of this Agreement, American Value and
Capital Appreciation will each take, or cause to be taken, all action, and do
or cause to be done, all things reasonably necessary, proper or advisable to
consummate and make effective the transactions contemplated by this Agreement.
4.6 Capital Appreciation shall furnish or cause to be furnished to
American Value within 30 days after the Closing Date a statement of Capital
Appreciation's assets and liabilities as of the Closing Date, which statement
shall be certified by Capital Appreciation's Treasurer and shall be in
accordance with generally accepted accounting principles consistently applied.
As promptly as practicable, but in any case within 60 days after the Closing
Date, Capital Appreciation shall furnish American Value, in such form as is
reasonably satisfactory to American Value, a statement certified by Capital
Appreciation's Treasurer of Capital Appreciation's earnings and profits for
Federal income tax purposes that will be carried over to American Value
pursuant to Section 381 of the Code.
4.7 As soon after the Closing Date as is reasonably practicable, Capital
Appreciation (a) shall prepare and file all Federal and other tax returns and
reports of Capital Appreciation required by law to be filed with respect to all
periods ending on or before the Closing Date but not theretofore filed and (b)
shall pay all Federal and other taxes shown as due thereon and/or all Federal
and other taxes that were unpaid as of the Closing Date, including without
limitation, all taxes for which the provision for payment was made as of the
Closing Date (as represented in paragraph 5.2(k)).
4.8 American Value agrees to use all reasonable efforts to obtain the
approvals and authorizations required by the 1933 Act and the 1940 Act and to
make such filings required by the state Blue Sky and securities laws as it may
deem appropriate in order to continue its operations after the Closing Date.
5. REPRESENTATIONS AND WARRANTIES
5.1 American Value represents and warrants to Capital Appreciation as
follows:
(a) American Value is a validly existing Massachusetts business trust
with full power to carry on its business as presently conducted;
(b) American Value is a duly registered, open-end, management investment
company, and its registration with the Commission as an investment company
under the 1940 Act and the registration of its shares under the 1933 Act
are in full force and effect;
(c) All of the issued and outstanding shares of American Value have been
offered and sold in compliance in all material respects with applicable
registration requirements of the 1933 Act and state securities laws. Shares
of American Value are registered in all jurisdictions in which they are
required to be registered under state securities laws and other laws, and
said registrations, including any periodic reports or supplemental filings,
are complete and current, all fees required to be paid have been paid, and
American Value is not subject to any stop order and is fully qualified to
sell its shares in each state in which its shares have been registered;
(d) The current Prospectus and Statement of Additional Information of
American Value conform in all material respects to the applicable
requirements of the 1933 Act and the 1940 Act and the regulations
thereunder and do not include any untrue statement of a material fact or
omit to state any material fact required to be stated therein or necessary
to make the statements therein, in light of the circumstances under which
they were made, not misleading;
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(e) American Value is not in, and the execution, delivery and performance
of this Agreement will not result in a, material violation of any provision
of American Value's Declaration of Trust or By-Laws or of any agreement,
indenture, instrument, contract, lease or other undertaking to which
American Value is a party or by which it is bound;
(f) No litigation or administrative proceeding or investigation of or
before any court or governmental body is presently pending or, to its
knowledge, threatened against American Value or any of its properties or
assets which, if adversely determined, would materially and adversely
affect its financial condition or the conduct of its business; and American
Value knows of no facts that might form the basis for the institution of
such proceedings and is not a party to or subject to the provisions of any
order, decree or judgment of any court or governmental body which
materially and adversely affects, or is reasonably likely to materially and
adversely effect, its business or its ability to consummate the
transactions herein contemplated;
(g) The Statement of Assets and Liabilities, Statement of Operations,
Statement of Changes in Net Assets and Financial Highlights for the year
ended December 31, 1997, of American Value certified by
PricewaterhouseCoopers LLP (copies of which have been furnished to Capital
Appreciation), fairly present, in all material respects, American Value's
financial condition as of such date in accordance with generally accepted
accounting principles, and its results of such operations, changes in its
net assets and financial highlights for such period, and as of such date
there were no known liabilities of American Value (contingent or otherwise)
not disclosed therein that would be required in accordance with generally
accepted accounting principles to be disclosed therein;
(h) All issued and outstanding American Value Shares are, and at the
Closing Date will be, duly and validly issued and outstanding, fully paid
and nonassessable with no personal liability attaching to the ownership
thereof, except as set forth under the caption "Additional Information" in
American Value's current Prospectus incorporated by reference in the
Registration Statement. American Value does not have outstanding any
options, warrants or other rights to subscribe for or purchase any of its
shares;
(i) The execution, delivery and performance of this Agreement have been
duly authorized by all necessary action on the part of American Value, and
this Agreement constitutes a valid and binding obligation of American Value
enforceable in accordance with its terms, subject as to enforcement, to
bankruptcy, insolvency, reorganization, moratorium and other laws relating
to or affecting creditors rights and to general equity principles. No other
consents, authorizations or approvals are necessary in connection with
American Value's performance of this Agreement;
(j) American Value Shares to be issued and delivered to Capital
Appreciation, for the account of the Capital Appreciation Shareholders,
pursuant to the terms of this Agreement will at the Closing Date have been
duly authorized and, when so issued and delivered, will be duly and validly
issued American Value Shares, and will be fully paid and non-assessable
with no personal liability attaching to the ownership thereof, except as
set forth under the caption "Additional Information" in American Value's
current Prospectus incorporated by reference in the Registration Statement;
(k) All material Federal and other tax returns and reports of American
Value required by law to be filed on or before the Closing Date have been
filed and are correct, and all Federal and other taxes shown as due or
required to be shown as due on said returns and reports have been paid or
provision has been made for the payment thereof, and to the best of
American Value's knowledge, no such return is currently under audit and no
assessment has been asserted with respect to any such return;
(l) For each taxable year since its inception, American Value has met the
requirements of Subchapter M of the Code for qualification and treatment as
a "regulated investment company" and
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neither the execution or delivery of nor the performance of its obligations
under this Agreement will adversely affect, and no other events are
reasonably likely to occur which will adversely affect the ability of
American Value to continue to meet the requirements of Subchapter M of the
Code;
(m) Since December 31, 1997 there has been no change by American Value in
accounting methods, principles, or practices, including those required by
generally accepted accounting principles;
(n) The information furnished or to be furnished by American Value for
use in registration statements, proxy materials and other documents which
may be necessary in connection with the transactions contemplated hereby
shall be accurate and complete in all material respects and shall comply in
all material respects with Federal securities and other laws and
regulations applicable thereto; and
(o) The Proxy Materials to be included in the Registration Statement
(only insofar as they relate to American Value) will, on the effective date
of the Registration Statement and on the Closing Date, not contain any
untrue statement of a material fact or omit to state a material fact
required to be stated therein or necessary to make the statements therein,
in light of the circumstances under which such statements were made, not
materially misleading.
5.2 Capital Appreciation represents and warrants to American Value as
follows:
(a) Capital Appreciation is a validly existing Massachusetts business
trust with full power to carry on its business as presently conducted;
(b) Capital Appreciation is a duly registered, open-end, management
investment company, and its registration with the Commission as an
investment company under the 1940 Act and the registration of its shares
under the 1933 Act are in full force and effect;
(c) All of the issued and outstanding shares of beneficial interest of
Capital Appreciation have been offered and sold in compliance in all
material respects with applicable requirements of the 1933 Act and state
securities laws. Shares of Capital Appreciation are registered in all
jurisdictions in which they are required to be registered and said
registrations, including any periodic reports or supplemental filings, are
complete and current, all fees required to be paid have been paid, and
Capital Appreciation is not subject to any stop order and is fully
qualified to sell its shares in each state in which its shares have been
registered;
(d) The current Prospectus and Statement of Additional Information of
Capital Appreciation conform in all material respects to the applicable
requirements of the 1933 Act and the 1940 Act and the regulations
thereunder and do not include any untrue statement of a material fact or
omit to state any material fact required to be stated therein or necessary
to make the statements therein, in light of the circumstances under which
they were made, not misleading;
(e) Capital Appreciation is not, and the execution, delivery and
performance of this Agreement will not result, in a material violation of
any provision of Capital Appreciation's Declaration of Trust or By-Laws or
of any agreement, indenture, instrument, contract, lease or other
undertaking to which Capital Appreciation is a party or by which it is
bound;
(f) No litigation or administrative proceeding or investigation of or
before any court or governmental body is presently pending or, to its
knowledge, threatened against Capital Appreciation or any of its properties
or assets which, if adversely determined, would materially and adversely
affect its financial condition or the conduct of its business; and Capital
Appreciation knows of no facts that might form the basis for the
institution of such proceedings and is not a party to or subject to the
provisions of any order, decree or judgment of any court or governmental
body which materially and adversely affects, or is reasonably likely to
materially and adversely effect, its business or its ability to consummate
the transactions herein contemplated;
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(g) The Statement of Assets and Liabilities, Statement of Operations,
Statement of Changes in Net Assets and Financial Highlights of Capital
Appreciation for the year ended November 30, 1997, certified by
PricewaterhouseCoopers LLP (copies of which have been or will be furnished
to American Value) fairly present, in all material respects, Capital
Appreciation's financial condition as of such date, and its results of
operations, changes in its net assets and financial highlights for such
period in accordance with generally accepted accounting principles, and as
of such date there were no known liabilities of Capital Appreciation
(contingent or otherwise) not disclosed therein that would be required in
accordance with generally accepted accounting principles to be disclosed
therein;
(h) Capital Appreciation has no material contracts or other commitments
(other than this Agreement) that will be terminated with liability to it
prior to the Closing Date;
(i) All issued and outstanding shares of Capital Appreciation are, and at
the Closing Date will be, duly and validly issued and outstanding, fully
paid and nonassessable with no personal liability attaching to the
ownership thereof, except as set forth under the caption "Additional
Information" in Capital Appreciation's current Prospectus incorporated by
reference in the Registration Statement. Capital Appreciation does not have
outstanding any options, warrants or other rights to subscribe for or
purchase any of its shares, nor is there outstanding any security
convertible to any of its shares. All such shares will, at the time of
Closing, be held by the persons and in the amounts set forth in the list of
shareholders submitted to American Value pursuant to paragraph 3.4;
(j) The execution, delivery and performance of this Agreement will have
been duly authorized prior to the Closing Date by all necessary action on
the part of Capital Appreciation, and subject to the approval of Capital
Appreciation's shareholders, this Agreement constitutes a valid and binding
obligation of Capital Appreciation, enforceable in accordance with its
terms, subject as to enforcement to bankruptcy, insolvency, reorganization,
moratorium and other laws relating to or affecting creditors rights and to
general equity principles. No other consents, authorizations or approvals
are necessary in connection with Capital Appreciation's performance of this
Agreement;
(k) All material Federal and other tax returns and reports of Capital
Appreciation required by law to be filed on or before the Closing Date
shall have been filed and are correct and all Federal and other taxes shown
as due or required to be shown as due on said returns and reports have been
paid or provision has been made for the payment thereof, and to the best of
Capital Appreciation's knowledge, no such return is currently under audit
and no assessment has been asserted with respect to any such return;
(l) For each taxable year since its inception, Capital Appreciation has
met all the requirements of Subchapter M of the Code for qualification and
treatment as a "regulated investment company" and neither the execution or
delivery of nor the performance of its obligations under this Agreement
will adversely affect, and no other events are reasonably likely to occur
which will adversely affect the ability of Capital Appreciation to continue
to meet the requirements of Subchapter M of the Code;
(m) At the Closing Date, Capital Appreciation will have good and valid
title to the Capital Appreciation Assets, subject to no liens (other than
the obligation, if any, to pay the purchase price of portfolio securities
purchased by Capital Appreciation which have not settled prior to the
Closing Date), security interests or other encumbrances, and full right,
power and authority to assign, deliver and otherwise transfer such assets
hereunder, and upon delivery and payment for such assets, American Value
will acquire good and marketable title thereto, subject to no restrictions
on the full transfer thereof, including any restrictions as might arise
under the 1933 Act;
(n) On the effective date of the Registration Statement, at the time of
the meeting of Capital Appreciation's shareholders and on the Closing Date,
the Proxy Materials (exclusive of the currently
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effective American Value Prospectus contained therein) will (i) comply in
all material respects with the provisions of the 1933 Act, the Securities
Exchange Act of 1934, as amended ("1934 Act") and the 1940 Act and the
regulations thereunder and (ii) not contain any untrue statement of a
material fact or omit to state a material fact required to be stated
therein or necessary to make the statements therein not misleading. Any
other information furnished by Capital Appreciation for use in the
Registration Statement or in any other manner that may be necessary in
connection with the transactions contemplated hereby shall be accurate and
complete and shall comply in all material respects with applicable Federal
securities and other laws and regulations thereunder;
(o) Capital Appreciation will, on or prior to the Valuation Date, declare
one or more dividends or other distributions to shareholders that, together
with all previous dividends and other distributions to shareholders, shall
have the effect of distributing to the shareholders all of its investment
company taxable income and net capital gain, if any, through the Valuation
Date (computed without regard to any deduction for dividends paid);
(p) Capital Appreciation has maintained or has caused to be maintained
on its behalf all books and accounts as required of a registered investment
company in compliance with the requirements of Section 31 of the 1940 Act and
the Rules thereunder; and
(q) Capital Appreciation is not acquiring American Value Shares to be
issued hereunder for the purpose of making any distribution thereof other
than in accordance with the terms of this Agreement.
6. CONDITIONS PRECEDENT TO OBLIGATIONS OF CAPITAL APPRECIATION
The obligations of Capital Appreciation to consummate the transactions
provided for herein shall be subject, at its election, to the performance by
American Value of all the obligations to be performed by it hereunder on or
before the Closing Date and, in addition thereto, the following conditions:
6.1 All representations and warranties of American Value contained in this
Agreement shall be true and correct in all material respects as of the date
hereof and, except as they may be affected by the transactions contemplated by
this Agreement, as of the Closing Date with the same force and effect as if
made on and as of the Closing Date;
6.2 American Value shall have delivered to Capital Appreciation a
certificate of its President and Treasurer, in a form reasonably satisfactory
to Capital Appreciation and dated as of the Closing Date, to the effect that
the representations and warranties of American Value made in this Agreement are
true and correct at and as of the Closing Date, except as they may be affected
by the transactions contemplated by this Agreement, and as to such other
matters as Capital Appreciation shall reasonably request;
6.3 Capital Appreciation shall have received a favorable opinion from
Gordon Altman Butowsky Weitzen Shalov & Wein, counsel to American Value, dated
as of the Closing Date, to the effect that:
(a) American Value is a validly existing Massachusetts business trust,
and has the power to own all of its properties and assets and to carry on
its business as presently conducted (Massachusetts counsel may be relied
upon in delivering such opinion); (b) American Value is a duly registered,
open-end, management investment company, and its registration with the
Commission as an investment company under the 1940 Act is in full force and
effect; (c) this Agreement has been duly authorized, executed and delivered
by American Value and, assuming that the Registration Statement complies
with the 1933 Act, the 1934 Act and the 1940 Act and regulations thereunder
and assuming due authorization, execution and delivery of this Agreement by
Capital Appreciation, is a valid and binding obligation of American Value
enforceable against American Value in accordance with its terms, subject as
to enforcement, to bankruptcy, insolvency,
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reorganization, moratorium and other laws relating to or affecting
creditors rights and to general equity principles; (d) American Value
Shares to be issued to Capital Appreciation Shareholders as provided by
this Agreement are duly authorized and upon such delivery will be validly
issued, fully paid and non-assessable (except as set forth under the
caption "Additional Information" in American Value's Prospectus), and no
shareholder of American Value has any preemptive rights to subscription or
purchase in respect thereof (Massachusetts counsel may be relied upon in
delivering such opinion); (e) the execution and delivery of this Agreement
did not, and the consummation of the transactions contemplated hereby will
not, violate American Value's Declaration of Trust or By-Laws; and (f) to
the knowledge of such counsel, no consent, approval, authorization or order
of any court or governmental authority of the United States or any state is
required for the consummation by American Value of the transactions
contemplated herein, except such as have been obtained under the 1933 Act,
the 1934 Act and the 1940 Act and such as may be required under state
securities laws; and
6.4 As of the Closing Date, there shall have been no material change in
the investment objective, policies and restrictions nor any increase in the
investment management fees or annual fees pursuant to American Value's 12b-1
plan of distribution from those described in American Value's Prospectus dated
May 1, 1998, As Revised, August 21, 1998 and Statement of Additional
Information dated May 1, 1998.
7. CONDITIONS PRECEDENT TO OBLIGATIONS OF AMERICAN VALUE
The obligations of American Value to complete the transactions provided
for herein shall be subject, at its election, to the performance by Capital
Appreciation of all the obligations to be performed by it hereunder on or
before the Closing Date and, in addition thereto, the following conditions:
7.1 All representations and warranties of Capital Appreciation contained
in this Agreement shall be true and correct in all material respects as of the
date hereof and, except as they may be affected by the transactions
contemplated by this Agreement, as of the Closing Date with the same force and
effect as if made on and as of the Closing Date;
7.2 Capital Appreciation shall have delivered to American Value at the
Closing a certificate of its President and its Treasurer, in form and substance
satisfactory to American Value and dated as of the Closing Date, to the effect
that the representations and warranties of Capital Appreciation made in this
Agreement are true and correct at and as of the Closing Date, except as they
may be affected by the transactions contemplated by this Agreement, and as to
such other matters as American Value shall reasonably request;
7.3 Capital Appreciation shall have delivered to American Value a
statement of the Capital Appreciation Assets and its liabilities, together with
a list of Capital Appreciation's portfolio securities and other assets showing
the respective adjusted bases and holding periods thereof for income tax
purposes, as of the Closing Date, certified by the Treasurer of Capital
Appreciation;
7.4 Capital Appreciation shall have delivered to American Value within
three business days after the Closing a letter from PricewaterhouseCoopers LLP
dated as of the Closing Date stating that (a) such firm has performed a limited
review of the Federal and state income tax returns of Capital Appreciation for
each of the last three taxable years and, based on such limited review, nothing
came to their attention that caused them to believe that such returns did not
properly reflect, in all material respects, the Federal and state income tax
liabilities of Capital Appreciation for the periods covered thereby, (b) for
the period from November 30, 1997 to and including the Closing Date, such firm
has performed a limited review (based on unaudited financial data) to ascertain
the amount of applicable Federal, state and local taxes and has determined that
same either have been paid or reserves have been established for payment of
such taxes, and, based on such limited review, nothing came to their attention
that caused them to believe that the taxes paid or reserves set aside for
payment
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of such taxes were not adequate in all material respects for the satisfaction
of all Federal, state and local tax liabilities for the period from November
30, 1997 to and including the Closing Date and (c) based on such limited
reviews, nothing came to their attention that caused them to believe that
Capital Appreciation would not qualify as a regulated investment company for
Federal income tax purposes for any such year or period;
7.5 American Value shall have received at the Closing a favorable opinion
from Gordon Altman Butowsky Weitzen Shalov & Wein, counsel to Capital
Appreciation, dated as of the Closing Date to the effect that:
(a) Capital Appreciation is a validly existing Massachusetts business
trust and has the power to own all of its properties and assets and to
carry on its business as presently conducted (Massachusetts counsel may be
relied upon in delivering such opinion); (b) Capital Appreciation is a duly
registered, open-end, management investment company under the 1940 Act, and
its registration with the Commission as an investment company under the
1940 Act is in full force and effect; (c) this Agreement has been duly
authorized, executed and delivered by Capital Appreciation and, assuming
that the Registration Statement complies with the 1933 Act, the 1934 Act
and the 1940 Act and the regulations thereunder and assuming due
authorization, execution and delivery of this Agreement by American Value,
is a valid and binding obligation of Capital Appreciation enforceable
against Capital Appreciation in accordance with its terms, subject as to
enforcement, to bankruptcy, insolvency, reorganization, moratorium and
other laws relating to or affecting creditors rights and to general equity
principles; (d) the execution and delivery of this Agreement did not, and
the consummation of the transactions contemplated hereby will not, violate
Capital Appreciation's Declaration of Trust or By-Laws; and (e) to the
knowledge of such counsel, no consent, approval, authorization or order of
any court or governmental authority of the United States or any state is
required for the consummation by Capital Appreciation of the transactions
contemplated herein, except such as have been obtained under the 1933 Act,
the 1934 Act and the 1940 Act and such as may be required under state
securities laws; and
7.6 On the Closing Date, the Capital Appreciation Assets shall include no
assets that American Value, by reason of limitations of the fund's Declaration
of Trust or otherwise, may not properly acquire.
8. FURTHER CONDITIONS PRECEDENT TO OBLIGATIONS OF AMERICAN VALUE
AND CAPITAL APPRECIATION
The obligations of Capital Appreciation and American Value hereunder are
each subject to the further conditions that on or before the Closing Date:
8.1 This Agreement and the transactions contemplated herein shall have
been approved by the requisite vote of the holders of the outstanding shares of
Capital Appreciation in accordance with the provisions of Capital
Appreciation's Declaration of Trust, and certified copies of the resolutions
evidencing such approval shall have been delivered to American Value;
8.2 On the Closing Date, no action, suit or other proceeding shall be
pending before any court or governmental agency in which it is sought to
restrain or prohibit, or obtain damages or other relief in connection with,
this Agreement or the transactions contemplated herein;
8.3 All consents of other parties and all other consents, orders and
permits of Federal, state and local regulatory authorities (including those of
the Commission and of state Blue Sky and securities authorities, including
"no-action" positions of and exemptive orders from such Federal and state
authorities) deemed necessary by American Value or Capital Appreciation to
permit consummation, in all material respects, of the transactions contemplated
herein shall have been obtained, except where failure to obtain any such
consent, order or permit would not involve risk of a material adverse effect on
the assets or properties of American Value or Capital Appreciation;
A-11
<PAGE>
8.4 The Registration Statement shall have become effective under the 1933
Act, no stop orders suspending the effectiveness thereof shall have been issued
and, to the best knowledge of the parties hereto, no investigation or
proceeding for that purpose shall have been instituted or be pending,
threatened or contemplated under the 1933 Act;
8.5 Capital Appreciation shall have declared and paid a dividend or
dividends and/or other distribution or distributions that, together with all
previous such dividends or distributions, shall have the effect of distributing
to the Capital Appreciation Shareholders all of Capital Appreciation's
investment company taxable income (computed without regard to any deduction for
dividends paid) and all of its net capital gain (after reduction for any
capital loss carry-forward and computed without regard to any deduction for
dividends paid) for all taxable years ending on or before the Closing Date; and
8.6 The parties shall have received a favorable opinion of the law firm of
Gordon Altman Butowsky Weitzen Shalov & Wein (based on such representations as
such law firm shall reasonably request), addressed to American Value and
Capital Appreciation, which opinion may be relied upon by the shareholders of
Capital Appreciation, substantially to the effect that, for Federal income tax
purposes:
(a) The transfer of substantially all of Capital Appreciation's assets in
exchange for American Value Shares and the assumption by American Value of
certain stated liabilities of Capital Appreciation followed by the
distribution by Capital Appreciation of American Value Shares to the
Capital Appreciation Shareholders in exchange for their Capital
Appreciation shares will constitute a "reorganization" within the meaning
of Section 368(a)(1)(C) of the Code, and Capital Appreciation and American
Value will each be a "party to a reorganization" within the meaning of
Section 368(b) of the Code;
(b) No gain or loss will be recognized by American Value upon the receipt
of the assets of Capital Appreciation solely in exchange for American Value
Shares and the assumption by American Value of the stated liabilities of
Capital Appreciation;
(c) No gain or loss will be recognized by Capital Appreciation upon the
transfer of the assets of Capital Appreciation to American Value in
exchange for American Value Shares and the assumption by American Value of
the stated liabilities or upon the distribution of American Value Shares to
the Capital Appreciation Shareholders in exchange for their Capital
Appreciation shares;
(d) No gain or loss will be recognized by the Capital Appreciation
Shareholders upon the exchange of the Capital Appreciation shares for
American Value Shares;
(e) The aggregate tax basis for American Value Shares received by each
Capital Appreciation Shareholder pursuant to the reorganization will be the
same as the aggregate tax basis of the Capital Appreciation Shares held by
each such Capital Appreciation Shareholder immediately prior to the
Reorganization;
(f) The holding period of American Value Shares to be received by each
Capital Appreciation Shareholder will include the period during which the
Capital Appreciation Shares surrendered in exchange therefor were held
(provided such Capital Appreciation Shares were held as capital assets on
the date of the Reorganization);
(g) The tax basis of the assets of Capital Appreciation acquired by
American Value will be the same as the tax basis of such assets to Capital
Appreciation immediately prior to the Reorganization; and
(h) The holding period of the assets of Capital Appreciation in the hands
of American Value will include the period during which those assets were
held by Capital Appreciation.
A-12
<PAGE>
Notwithstanding anything herein to the contrary, neither American Value
nor Capital Appreciation may waive the conditions set forth in this paragraph
8.6.
9. FEES AND EXPENSES
9.1 (a) American Value shall bear its expenses incurred in connection with
the entering into, and carrying out of, the provisions of this Agreement,
including legal, accounting, Commission registration fees and Blue Sky
expenses. Capital Appreciation shall bear its expenses incurred in connection
with the entering into and carrying out of the provisions of this Agreement,
including legal and accounting fees, printing, filing and proxy solicitation
expenses and portfolio transfer taxes (if any) incurred in connection with the
consummation of the transactions contemplated herein.
(b) In the event the transactions contemplated herein are not consummated
by reason of Capital Appreciation being either unwilling or unable to go
forward (other than by reason of the nonfulfillment or failure of any condition
to Capital Appreciation's obligations specified in this Agreement), Capital
Appreciation's only obligation hereunder shall be to reimburse American Value
for all reasonable out-of-pocket fees and expenses incurred by American Value
in connection with those transactions.
(c) In the event the transactions contemplated herein are not consummated
by reason of American Value being either unwilling or unable to go forward
(other than by reason of the nonfulfillment or failure of any condition to
American Value's obligations specified in this Agreement), American Value's
only obligation hereunder shall be to reimburse Capital Appreciation for all
reasonable out-of-pocket fees and expenses incurred by Capital Appreciation in
connection with those transactions.
10. ENTIRE AGREEMENT; SURVIVAL OF WARRANTIES
10.1 This Agreement constitutes the entire agreement between the parties.
10.2 The representations, warranties and covenants contained in this
Agreement or in any document delivered pursuant hereto or in connection
herewith shall survive the consummation of the transactions contemplated
herein, except that the representations, warranties and covenants of Capital
Appreciation hereunder shall not survive the dissolution and complete
liquidation of Capital Appreciation in accordance with Section 1.9.
11. TERMINATION
11.1 This Agreement may be terminated and the transactions contemplated
hereby may be abandoned at any time prior to the Closing:
(a) by the mutual written consent of Capital Appreciation and American
Value;
(b) by either American Value or Capital Appreciation by notice to the
other, without liability to the terminating party on account of such
termination (providing the terminating party is not otherwise in material
default or breach of this Agreement) if the Closing shall not have occurred
on or before May 31, 1999; or
(c) by either American Value or Capital Appreciation, in writing without
liability to the terminating party on account of such termination (provided
the terminating party is not otherwise in material default or breach of
this Agreement), if (i) the other party shall fail to perform in any
material respect its agreements contained herein required to be performed
on or prior to the Closing Date, (ii) the other party materially breaches
any of its representations, warranties or covenants contained herein, (iii)
the Capital
A-13
<PAGE>
Appreciation shareholders fail to approve this Agreement at any meeting
called for such purpose at which a quorum was present or (iv) any other
condition herein expressed to be precedent to the obligations of the
terminating party has not been met and it reasonably appears that it will
not or cannot be met.
11.2 (a) Termination of this Agreement pursuant to paragraphs 11.1 (a) or
(b) shall terminate all obligations of the parties hereunder and there shall be
no liability for damages on the part of American Value or Capital Appreciation,
or the trustees or officers of American Value or Capital Appreciation, to any
other party or its trustees or officers.
(b) Termination of this Agreement pursuant to paragraph 11.1 (c) shall
terminate all obligations of the parties hereunder and there shall be no
liability for damages on the part of American Value or Capital
Appreciation, or the trustees or officers of American Value or Capital
Appreciation, except that any party in breach of this Agreement shall, upon
demand, reimburse the non-breaching party for all reasonable out-of-pocket
fees and expenses incurred in connection with the transactions contemplated
by this Agreement, including legal, accounting and filing fees.
12. AMENDMENTS
This Agreement may be amended, modified or supplemented in such manner as
may be mutually agreed upon in writing by the parties.
13. MISCELLANEOUS
13.1 The article and paragraph headings contained in this Agreement are
for reference purposes only and shall not affect in any way the meaning or
interpretation of this Agreement.
13.2 This Agreement may be executed in any number of counterparts, each of
which shall be deemed an original.
13.3 This Agreement shall be governed by and construed in accordance with
the laws of the Commonwealth of Massachusetts.
13.4 This Agreement shall bind and inure to the benefit of the parties
hereto and their respective successors and assigns, but no assignment or
transfer hereof or of any rights or obligations hereunder shall be made by any
party without the written consent of the other party. Nothing herein expressed
or implied is intended or shall be construed to confer upon or give any person,
firm or corporation, other than the parties hereto and their respective
successors and assigns, any rights or remedies under or by reason of this
Agreement.
13.5 The obligations and liabilities of American Value hereunder are
solely those of American Value. It is expressly agreed that no shareholder,
nominee, trustee, officer, agent, or employee of American Value shall be
personally liable hereunder. The execution and delivery of this Agreement have
been authorized by the trustees of American Value and signed by authorized
officers of American Value acting as such, and neither such authorization by
such trustees nor such execution and delivery by such officers shall be deemed
to have been made by any of them individually or to impose any liability on any
of them personally.
13.6 The obligations and liabilities of Capital Appreciation hereunder are
solely those of Capital Appreciation. It is expressly agreed that no
shareholder, nominee, trustee, officer, agent, or employee of Capital
Appreciation shall be personally liable hereunder. The execution and delivery
of this Agreement have been authorized by the trustees of Capital Appreciation
and signed by authorized officers of Capital Appreciation acting as such, and
neither such authorization by such trustees nor such execution and delivery by
such officers shall be deemed to have been made by any of them individually or
to impose any liability on any of them personally.
A-14
<PAGE>
IN WITNESS WHEREOF, each of the parties hereto has caused this Agreement
to be executed by a duly authorized officer.
MORGAN STANLEY DEAN WITTER CAPITAL
APPRECIATION FUND
By: /s/ CHARLES A. FIUMEFREDDO
--------------------------------------------
Name: Charles A. Fiumefreddo
Title: President
MORGAN STANLEY DEAN WITTER AMERICAN
VALUE FUND
By: /s/ BARRY FINK
--------------------------------------------
Name: Barry Fink
Title: Vice President
A-15
<PAGE>
PROSPECTUS
MAY 1, 1998,
AS REVISED AUGUST 21, 1998
Morgan Stanley Dean Witter American Value Fund (the
"Fund") is an open-end diversified management investment company whose
investment objective is long-term capital growth consistent with an effort to
reduce volatility. The Fund invests principally in common stock of companies in
industries which, at the time of the investment, are believed to be
attractively valued given their above average relative earnings growth
potential at that time. (See "Investment Objective and Policies.")
The Fund offers four classes of shares (each, a
"Class"), each with a different combination of sales charges, ongoing fees and
other features. The different distribution arrange- ments permit an investor to
choose the method of purchasing shares that the investor believes is most
beneficial given the amount of the purchase, the length of time the investor
expects to hold the shares and other relevant circumstances. (See "Purchase of
Fund Shares--Alternative Purchase Arrangements.")
This Prospectus sets forth concisely the information
you should know before investing in the Fund. It should be read and retained
for future reference. Additional information about the Fund is contained in the
Statement of Additional Information, dated May 1, 1998, which has been filed
with the Securities and Exchange Commission, and which is available at no
charge upon request of the Fund at the address or telephone numbers listed on
this page. The Statement of Additional Information is incorporated herein by
reference.
Morgan Stanley Dean Witter
American Value Fund
Two World Trade Center
New York, New York 10048
(212) 392-2550 or
(800) 869-NEWS (toll-free)
TABLE OF CONTENTS
Prospectus Summary/ 2
Summary of Fund Expenses/ 4
Financial Highlights/ 6
The Fund and its Management/ 9
Investment Objective and Policies/ 10
Risk Considerations/ 14
Investment Restrictions/ 17
Purchase of Fund Shares/ 18
Shareholder Services/ 29
Redemptions and Repurchases/ 32
Dividends, Distributions and Taxes/ 33
Performance Information/ 34
Additional Information/ 35
Shares of the Fund are not deposits or obligations of, or guaranteed or
endorsed by, any bank, and the shares are not federally insured by the Federal
Deposit Insurance Corporation, the Federal Reserve Board, or any other agency.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURI-TIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPEC-TUS. ANY REPRESENTATION TO THE CONTRARY IS
A CRIMINAL OFFENSE.
MORGAN STANLEY DEAN WITTER
DISTRIBUTORS INC.,
DISTRIBUTOR
<PAGE>
PROSPECTUS SUMMARY
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
<S> <C>
- --------------------------------------------------------------------------------------------------------------------------
The The Fund, a Massachusetts business trust, is an open-end diversified management investment
Fund company investing principally in industries which, at the time of investment, are believed to be
attractively valued given their above average relative earnings growth potential at that time (see
page 9).
- --------------------------------------------------------------------------------------------------------------------------
Shares Offered Shares of beneficial interest with $0.01 par value (see page 35). The Fund offers four Classes
of shares, each with a different combination of sales charges, ongoing fees and other features
(see pages 18-28).
- --------------------------------------------------------------------------------------------------------------------------
Minimum The minimum initial investment for each Class is $1,000 ($100 if the account is opened through
Purchase EasyInvestSM). Class D shares are only available to persons investing $5 million ($25 million for
certain qualified plans) or more and to certain other limited categories of investors. For the
purpose of meeting the minimum $5 million (or $25 million) investment for Class D shares, and
subject to the $1,000 minimum initial investment for each Class of the Fund, an investor's
existing holdings of Class A shares and shares of funds for which Morgan Stanley Dean Witter
Advisors Inc. serves as investment manager ("Morgan Stanley Dean Witter Funds") that are
sold with a front-end sales charge, and concurrent investments in Class D shares of the Fund
and other Morgan Stanley Dean Witter Funds that are multiple class funds, will be aggregated.
The minimum subsequent investment is $100 (see page 18).
- -------------------------------------------------------------------------------------------------------------------------
Investment The investment objective of the Fund is capital growth consistent with an effort to reduce volatility.
Objective
- --------------------------------------------------------------------------------------------------------------------------
Investment Morgan Stanley Dean Witter Advisors Inc., the Investment Manager of the Fund, and its
Manager wholly-owned subsidiary, Morgan Stanley Dean Witter Services Company Inc., serve in various
investment management, advisory, management and administrative capacities to 102 investment
companies and other portfolios with assets of approximately $115.9 billion at July 31, 1998 (see
page 9).
- --------------------------------------------------------------------------------------------------------------------------
Management The Investment Manager receives a monthly fee at an annual rate of 0.625 of 1% of daily net
Fee assets up to $250 million in net assets; 0.50 of 1% of daily net assets over $250 million but not
exceeding $2.5 billion; 0.475 of 1% of daily net assets exceeding $2.5 billion but not exceeding
$3.5 billion; 0.45 of 1% of daily net assets exceeding $3.5 billion but not exceeding $4.5 billion;
and 0.425 of 1% of the daily net assets exceeding $4.5 billion (see page 9).
- --------------------------------------------------------------------------------------------------------------------------
Distributor and Morgan Stanley Dean Witter Distributors Inc. is the Distributor of the Fund's shares. The Fund
Distribution Fee has adopted a distribution plan pursuant to Rule 12b-1 under the Investment Company Act (the
"12b-1 Plan") with respect to the distribution fees paid by the Class A, Class B and Class C
shares of the Fund to the Distributor. The entire 12b-1 fee payable by Class A and a portion of
the 12b-1 fee payable by each of Class B and Class C equal to 0.25% of the average daily net
assets of the Class are currently each characterized as a service fee within the meaning of the
National Association of Securities Dealers, Inc. guidelines. The remaining portion of the 12b-1
fee, if any, is characterized as an asset-based sales charge (see pages 18 and 27).
- --------------------------------------------------------------------------------------------------------------------------
Alternative Four classes of shares are offered:
Purchase
Arrangements o Class A shares are offered with a front-end sales charge, starting at 5.25% and reduced for
larger purchases. Investments of $1 million or more (and investments by certain other limited
categories of investors) are not subject to any sales charge at the time of purchase but a
contingent deferred sales charge ("CDSC") of 1.0% may be imposed on redemptions within one
year of purchase. The Fund is authorized to reimburse the Distributor for specific expenses
incurred in promoting the distribution of the Fund's Class A shares and servicing shareholder
accounts pursuant to the Fund's 12b-1 Plan. Reimbursement may in no event exceed an amount
equal to payments at an annual rate of 0.25% of average daily net assets of the Class (see pages
18, 21 and 27).
- --------------------------------------------------------------------------------------------------------------------------
</TABLE>
2
<PAGE>
<TABLE>
<S> <C>
- --------------------------------------------------------------------------------
o Class B shares are offered without a front-end sales charge, but will in most cases be subject to a
CDSC (scaled down from 5.0% to 1.0%) if redeemed within six years after purchase. The CDSC will be
imposed on any redemption of shares if after such redemption the aggregate current value of a Class B
account with the Fund falls below the aggregate amount of the investor's purchase payments made during
the six years preceding the redemption. A different CDSC schedule applies to investments by certain
qualified plans. Class B shares are also subject to a 12b-1 fee assessed at the annual rate of 1.0% of
the lesser of: (a) the average daily aggregate net sales of the Fund's Class B shares since
implementation of the 12b-1 Plan on April 30, 1984 or (b) the average daily net assets of Class B
attributable to shares issued since implementation of the 12b-1 Plan. All shares of the Fund held prior
to July 28, 1997, other than shares which were purchased prior to April 30, 1984 (and, with respect to
such shares, certain shares acquired through reinvestment of dividends and capital gains
distributions), have been designated Class B shares. Shares which were purchased prior to April 30,
1984 (and, with respect to such shares, certain shares acquired through reinvestment of dividends and
capital gains distributions) have been designated Class D shares. Shares held before May 1, 1997 that
have been designated Class B shares will convert to Class A shares in May, 2007. In all other
instances, Class B shares convert to Class A shares approximately ten years after the date of the
original purchase (see pages 18, 24 and 27).
o Class C shares are offered without a front-end sales charge, but will in most cases be subject to a
CDSC of 1.0% if redeemed within one year after purchase. The Fund is authorized to reimburse the
Distributor for specific expenses incurred in promoting the distribution of the Fund's Class C shares
and servicing shareholder accounts pursuant to the Fund's 12b-1 Plan. Reimbursement may in no event
exceed an amount equal to payments at an annual rate of 1.0% of average daily net assets of the Class
(see pages 18, 26 and 27).
o Class D shares are offered only to investors meeting an initial investment minimum of $5 million ($25
million for certain qualified plans) and to certain other limited categories of investors. Class D
shares are offered without a front-end sales charge or CDSC and are not subject to any 12b-1 fee (see
pages 18, 26 and 27).
- ----------------------------------------------------------------------------------------------------------------------------
Dividends and It is anticipated that distributions of income and net short-term capital gains, if any, will be made
Capital Gains semi-annually. Net long-term capital gains, if any, are distributed at least annually. The Fund may,
Distributions however, determine to retain all or part of any net long-term capital gains in any year for
reinvestment. Dividends and capital gains distributions paid on shares of a Class are automatically
reinvested in additional shares of the same Class at net asset value unless the shareholder elects to
receive cash. Shares acquired by dividend and distribution reinvestment will not be subject to any
sales charge or CDSC (see pages 29 and 33).
- -------------------------------------------------------------------------------------------------------------------------------
Redemption Shares are redeemable by the shareholder at net asset value less any applicable CDSC on Class A, Class
B or Class C shares. An account may be involuntarily redeemed if the total value of the account is less
than $100 or, if the account was opened through EasyInvestSM, if after twelve months the shareholder
has invested less than $1,000 in the account (see page 32).
- -------------------------------------------------------------------------------------------------------------------------------
Risks The net asset value of the Fund's shares will fluctuate with changes in the market value of its
portfolio securities. Emphasis on attractive industries may run contrary to general market assessments
and may involve risks associated with departure from typical S&P 500 industry weightings. It should be
recognized that the Fund's investments in small and medium-capitalization companies involve greater
risk than is customarily associated with investing in larger, more established companies. The Fund may
invest in the securities of foreign issuers which entails additional risks.The Fund may also invest in
futures and options which may be considered speculative in nature and may involve greater risks than
those customarily assumed by other investment companies which do not invest in such instruments (see
pages 14-16).
- -------------------------------------------------------------------------------------------------------------------------------
</TABLE>
The above is qualified in its entirety by the detailed information appearing
elsewhere in the Prospectus
and in the Statement of Additional Information.
3
<PAGE>
SUMMARY OF FUND EXPENSES
- --------------------------------------------------------------------------------
The following table illustrates all expenses and fees that a shareholder
of the Fund will incur. The expenses and fees set forth in the table are based
on the expenses and fees for the fiscal year ended December 31, 1997.
<TABLE>
<CAPTION>
Class A Class B Class C Class D
--------------- --------------- --------------- ----------
<S> <C> <C> <C> <C>
Shareholder Transaction Expenses
Maximum Sales Charge Imposed on Purchases (as a
percentage of offering price) ......................... 5.25%(1) None None None
Sales Charge Imposed on Dividend Reinvestments ......... None None None None
Maximum Contingent Deferred Sales Charge
(as a percentage of original purchase price or
redemption proceeds) .................................. None(2) 5.00%(3) 1.00%(4) None
Redemption Fees ........................................ None None None None
Exchange Fee ........................................... None None None None
Annual Fund Operating Expenses (as a percentage of average net assets)
Management Fees ........................................ 0.50% 0.50% 0.50% 0.50%
12b-1 Fees (5) (6) ..................................... 0.25% 0.83% 1.00% None
Other Expenses ......................................... 0.13% 0.13% 0.13% 0.13%
Total Fund Operating Expenses (7) ...................... 0.88% 1.46% 1.63% 0.63%
</TABLE>
- ----------
(1) Reduced for purchases of $25,000 and over (see "Purchase of Fund
Shares--Initial Sales Charge Alternative--Class A Shares").
(2) Investments that are not subject to any sales charge at the time of
purchase are subject to a CDSC of 1.00% that will be imposed on
redemptions made within one year after purchase, except for certain
specific circumstances (see "Purchase of Fund Shares--Initial Sales
Charge Alternative--Class A Shares").
(3) The CDSC is scaled down to 1.00% during the sixth year, reaching zero
thereafter.
(4) Only applicable to redemptions made within one year after purchase (see
"Purchase of Fund Shares--Level Load Alternative--Class C Shares").
(5) The 12b-1 fee is accrued daily and payable monthly. The entire 12b-1 fee
payable by Class A and a portion of the 12b-1 fee payable by each of
Class B and Class C equal to 0.25% of the average daily net assets of the
Class are currently each characterized as a service fee within the
meaning of National Association of Securities Dealers, Inc. ("NASD")
guidelines and are payments made for personal service and/or maintenance
of shareholder accounts. The remainder of the 12b-1 fee, if any, is an
asset-based sales charge, and is a distribution fee paid to the
Distributor to compensate it for the services provided and the expenses
borne by the Distributor and others in the distribution of the Fund's
shares (see "Purchase of Fund Shares--Plan of Distribution").
(6) Upon conversion of Class B shares to Class A shares, such shares will be
subject to the lower 12b-1 fee applicable to Class A shares. No sales
charge is imposed at the time of conversion of Class B shares to Class A
shares. Class C shares do not have a conversion feature and, therefore,
are subject to an ongoing 1.00% distribution fee (see "Purchase of Fund
Shares--Alternative Purchase Arrangements").
(7) There were no outstanding shares of Class A, Class C or Class D prior to
July 28, 1997. Accordingly, "Total Fund Operating Expenses," as shown
above with respect to those Classes, are estimates based upon the sum of
12b-1 Fees, Management Fees and estimated "Other Expenses."
4
<PAGE>
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Examples 1 year 3 years 5 years 10 years
- ---------------------------------------------------------------- -------- --------- --------- ---------
<S> <C> <C> <C> <C>
You would pay the following expenses on a $1,000 investment
assuming (1) a 5% annual return and (2) redemption at the end of
each time period:
Class A ...................................................... $61 $79 $ 99 $155
Class B ...................................................... $65 $76 $100 $175
Class C ...................................................... $27 $51 $ 89 $193
Class D ...................................................... $ 6 $20 $ 35 $ 79
You would pay the following expenses on the same $1,000
investment assuming no redemption at the end of the period:
Class A ...................................................... $61 $79 $ 99 $155
Class B ...................................................... $15 $46 $ 80 $175
Class C ...................................................... $17 $51 $ 89 $193
Class D ...................................................... $ 6 $20 $ 35 $ 79
</TABLE>
THE ABOVE EXAMPLES SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR
FUTURE EXPENSES OR PERFORMANCE. ACTUAL EXPENSES OF EACH CLASS MAY BE GREATER OR
LESS THAN THOSE SHOWN.
The purpose of this table is to assist the investor in understanding the
various costs and expenses that an investor in the Fund will bear directly or
indirectly. For a more complete description of these costs and expenses, see
"The Fund and its Management," "Purchase of Fund Shares--Plan of Distribution"
and "Redemptions and Repurchases."
Long-term shareholders of Class B and Class C may pay more in sales
charges, including distribution fees, than the economic equivalent of the
maximum front-end sales charges permitted by the NASD.
5
<PAGE>
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
The following per share data and ratios for a share of beneficial interest
outstanding throughout each period have been audited by PricewaterhouseCoopers
LLP, independent accountants. The financial highlights should be read in
conjunction with the financial statements and notes thereto and the unqualified
report of the independent accountants which are contained in the Statement of
Additional Information. Further information about the performance of the Fund
is contained in the Fund's Annual Report to Shareholders, which may be obtained
without charge upon request to the Fund.
<TABLE>
<CAPTION>
For the Year Ended December 31,
-----------------------------------------------------
1997*++ 1996 1995 1994
-------------- -------------- ----------- -----------
<S> <C> <C> <C> <C>
CLASS B SHARES
PER SHARE OPERATING
PERFORMANCE:
Net asset value, beginning
of period ..................... $27.01 $27.16 $21.21 $23.10
------- ------- ------- --------
Net investment income
(loss) ........................ (0.10) (0.08) 0.01 --
Net realized and
unrealized gain (loss) ........ 8.34 2.86 8.87 (1.57)
--------- --------- ------- --------
Total from investment
operations .................... 8.24 2.78 8.88 (1.57)
--------- --------- ------- --------
Less dividends and
distributions from:
Net investment income -- (0.01) -- --
Net realized gain ............. (5.74) (2.92) (2.93) (0.32)
Paid-in-capital ............... -- -- -- --
--------- --------- -------- --------
Total dividends and
distributions ................. (5.74) (2.93) (2.93) (0.32)
--------- --------- -------- --------
Net asset value, end of
period ........................ $29.51 $27.01 $27.16 $21.21
========= ========= ======== ========
TOTAL INVESTMENT
RETURN+ ........................ 31.55% 10.53% 42.20% (6.75)%
RATIOS TO AVERAGE NET
ASSETS:
Expenses ....................... 1.46% 1.53% 1.61% 1.71%
Net investment income
(loss) ........................ (0.34)% (0.33)% 0.06% 0.01%
SUPPLEMENTAL DATA:
Net assets, end of period,
in millions ................... $4,078 $3,099 $2,389 $1,490
Portfolio turnover rate ........ 275% 279% 256% 295%
Average commission rate
paid .......................... $0.0563 $0.0590 -- --
<CAPTION>
For the Year Ended December 31,
-----------------------------------------------------------------------
1993 1992 1991 1990 1989 1988
----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
CLASS B SHARES
PER SHARE OPERATING
PERFORMANCE:
Net asset value, beginning
of period ..................... $20.93 $20.66 $14.39 $14.81 $13.19 $12.21
-------- ------- ------- -------- ------- -------
Net investment income
(loss) ........................ (0.09) 0.03 0.05 0.24 0.34 0.29
Net realized and
unrealized gain (loss) ........ 3.94 0.71 7.90 (0.38) 2.99 1.03
-------- ------- ------- -------- ------- -------
Total from investment
operations .................... 3.85 0.74 7.95 (0.14) 3.33 1.32
-------- ------- ------- -------- ------- -------
Less dividends and
distributions from:
Net investment income (0.01) (0.03) (0.03) (0.28) (0.32) (0.33)
Net realized gain ............. (1.67) (0.44) (1.65) -- (1.39) --
Paid-in-capital ............... -- -- -- -- -- (0.01)
-------- -------- -------- -------- -------- --------
Total dividends and
distributions ................. (1.68) (0.47) (1.68) (0.28) (1.71) (0.34)
-------- -------- -------- -------- -------- --------
Net asset value, end of
period ........................ $23.10 $20.93 $20.66 $14.39 $14.81 $13.19
======== ======== ======== ======== ======== ========
TOTAL INVESTMENT
RETURN+ ........................ 18.70% 3.84% 56.26% (0.90)% 25.39% 10.84%
RATIOS TO AVERAGE NET
ASSETS:
Expenses ....................... 1.61% 1.72% 1.58% 1.70% 1.66% 1.78%
Net investment income
(loss) ........................ (0.59)% 0.18% 0.29% 1.67% 2.23% 2.15%
SUPPLEMENTAL DATA:
Net assets, end of period,
in millions ................... $1,218 $459 $227 $89 $100 $90
Portfolio turnover rate ........ 276% 305% 264% 234% 196% 133%
Average commission rate
paid .......................... -- -- -- -- -- --
</TABLE>
- ----------
* Prior to July 28, 1997, the Fund issued one class of shares. All shares
of the Fund held prior to that date, other than shares which were
purchased prior to April 30, 1984 (and with respect to such
shares, certain shares acquired through reinvestment of
dividends and capital gains distributions (collectively the "Old
Shares")), have been designated Class B shares. The Old Shares have
been designated Class D shares.
++ 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.
6
<PAGE>
FINANCIAL HIGHLIGHTS, continued
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
For the Period
July 28, 1997*
Through
December 31, 1997++
----------------------
<S> <C>
CLASS A SHARES
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period .............. $31.87
----------
Net investment income ............................. 0.05
Net realized and unrealized gain .................. 2.32
----------
Total from investment operations .................. 2.37
----------
Less distributions from net realized gain ......... (4.65)
----------
Net asset value, end of period .................... $29.59
==========
TOTAL INVESTMENT RETURN+ .......................... 7.70%(1)
RATIOS TO AVERAGE NET ASSETS:
Expenses .......................................... 0.92%(2)
Net investment income ............................. 0.38%(2)
SUPPLEMENTAL DATA:
Net assets, end of period, in thousands ........... $15,844
Portfolio turnover rate ........................... 275%
Average commission rate paid ...................... $0.0563
CLASS C SHARES
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period .............. $31.87
--------------
Net investment loss ............................... (0.05)
Net realized and unrealized gain .................. 2.32
--------------
Total from investment operations .................. 2.27
--------------
Less distributions from net realized gain ......... (4.65)
--------------
Net asset value, end of period .................... $29.49
==============
TOTAL INVESTMENT RETURN+ .......................... 7.39%(1)
RATIOS TO AVERAGE NET ASSETS:
Expenses .......................................... 1.66%(2)
Net investment loss ............................... (0.36)%(2)
SUPPLEMENTAL DATA:
Net assets, end of period, in thousands ........... $12,204
Portfolio turnover rate ........................... 275%
Average commission rate paid ...................... $0.0563
</TABLE>
- ----------
* The date shares were first issued.
++ 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.
7
<PAGE>
FINANCIAL HIGHLIGHTS, continued
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
For the Period
July 28, 1997*
Through
December 31, 1997++
--------------------
<S> <C>
CLASS D SHARES
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period .............. $31.87
--------
Net investment income ............................. 0.07
Net realized and unrealized gain .................. 2.34
--------
Total from investment operations .................. 2.41
--------
Less distributions from net realized gain ......... (4.65)
--------
Net asset value, end of period .................... $29.63
========
TOTAL INVESTMENT RETURN+ .......................... 7.83%(1)
RATIOS TO AVERAGE NET ASSETS:
Expenses .......................................... 0.64%(2)
Net investment income ............................. 0.50%(2)
SUPPLEMENTAL DATA:
Net assets, end of period, in thousands ........... $49,772
Portfolio turnover rate ........................... 275%
Average commission rate paid ...................... $0.0563
</TABLE>
- ----------
* The date shares were first issued. Shareholders who held shares of the
Fund prior to July 28, 1997 (the date the Fund converted
to a multiple class share structure) should refer to the Financial
Highlights of Class B to obtain the historical per share data and ratio
information of their shares.
++ 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.
8
<PAGE>
THE FUND AND ITS MANAGEMENT
- --------------------------------------------------------------------------------
Morgan Stanley Dean Witter American Value Fund (the "Fund") (formerly
named Dean Witter American Value Fund) is an open-end diversified management
investment company incorporated in Maryland on December 13, 1979. The Fund was
reorganized as a trust of the type commonly known as a "Massachusetts business
trust" on April 30, 1987, at which time its name was changed from Dean Witter
Industry-Valued Securities Inc. to Dean Witter American Value Fund.
Morgan Stanley Dean Witter Advisors Inc. ("MSDW Advisors" or the
"Investment Manager"), whose address is Two World Trade Center, New York, New
York 10048, is the Fund's Investment Manager. The Investment Manager is a
wholly-owned subsidiary of Morgan Stanley Dean Witter & Co. a preeminent global
financial services firm that maintains leading market positions in each of its
three primary businesses -- securities, asset management and credit services.
The Investment Manager, which was incorporated in July, 1992 under the name
Dean Witter InterCapital Inc., changed its name to Morgan Stanley Dean Witter
Advisors Inc. on June 22, 1998.
MSDW Advisors and its wholly-owned subsidiary, Morgan Stanley Dean
Witter Services Company, Inc. ("MSDW Services"), serve in various investment
management, advisory, management and administrative capacities to a total of
102 investment companies, 28 of which are listed on the New York Stock
Exchange, with combined total assets of approximately $111.6 billion as of July
31, 1998. The Investment Manager also manages portfolios of pension plans,
other institutions and individuals which aggregated approximately $4.3 billion
at such date.
The Fund has retained the Investment Manager to provide administrative
services, manage its business affairs and manage the investment of the Fund's
assets, including the placing of orders for the purchase and sale of portfolio
securities. MSDW Advisors has retained MSDW Services to perform the
aforementioned administrative services for the Fund.
The Fund's Board of Trustees reviews the various services provided by or
under the direction of the Investment Manager to ensure that the Fund's general
investment policies and programs are being properly carried out and that
administrative services are being provided in a satisfactory manner.
As full compensation for the services and facilities furnished to the
Fund and for expenses of the Fund assumed by the Investment Manager, the Fund
pays the Investment Manager monthly compensation calculated daily by applying
the following annual rates to the net assets of the Fund determined as of the
close of each business day: 0.625% of the portion of daily net assets not
exceeding $250 million; 0.50% of the portion of daily net assets exceeding $250
million but not exceeding $2.5 billion; 0.475% of the portion of daily net
assets exceeding $2.5 billion but not exceeding $3.5 billion; 0.45% of the
portion of daily net assets exceeding $3.5 billion but not exceeding $4.5
billion; and 0.425% of the portion of daily net assets exceeding $4.5 billion.
For the fiscal year ended December 31, 1997, the Fund accrued total
compensation to the Investment Manager amounting to 0.50% of the Fund's average
daily net assets and the total expenses of Class B amounted to 1.46% of the
Fund's average daily net assets of Class B. Shares of Class A, Class C and
Class D were first issued on July 28, 1997. The expenses of the Fund include:
the fee of the Investment Manager; the fee pursuant to the Plan of Distribution
(see "Purchase of Fund Shares"); taxes, transfer agent, custodian and auditing
fees; certain legal fees; and printing and other expenses relating to the
Fund's operations which are not expressly assumed by the Investment Manager
under its Investment Management Agreement with the Fund.
9
<PAGE>
INVESTMENT OBJECTIVE AND POLICIES
- --------------------------------------------------------------------------------
The investment objective of the Fund is long-term capital growth consistent
with an effort to reduce volatility. There is no assurance that the Fund's
objective will be achieved. The investment objective may not be changed without
the approval of the shareholders of the Fund. The investment policies discussed
below may be changed without shareholder approval.
The Fund seeks to achieve its investment objective by investing in a
diversified portfolio of securities consisting principally of common stocks.
The Fund utilizes an investment process that places primary emphasis on seeking
to identify industries, rather than individual companies, as prospects for
capital appreciation. The Investment Manager seeks to invest the assets of the
Fund in those industries that, at the time of investment, are attractively
valued given their above average relative earnings growth potential at that
time. Therefore, the Fund is typically over-weighted in those sectors deemed to
be attractive given their potential for above average earnings growth.
After selection of the Fund's target industries, specific company
investments are selected. In this process, the Investment Manager seeks to
identify companies whose prospects are deemed attractive on the basis of an
evaluation of valuation screens and prospective company fundamentals.
The Investment Manager seeks to identify what stage of the business
cycle the economy is in and which industry groups have historically
outperformed the overall market during that stage of the cycle, i.e.,
typically, groups that tend to have the highest relative earnings growth at
that point in the cycle. The Investment Manager also analyzes secular trends
such as demographics, international trade, etc., that could cause the current
cycle to differ from prior cycles and attempts to weight the portfolio
appropriately, given those factors.
Following selection of the Fund's specific investments, the Investment
Manager will attempt to allocate the assets of the Fund so as to reduce the
volatility of its portfolio. In doing so, the Fund may hold a portion of its
portfolio in fixed-income securities (including zero coupon securities) in an
effort to moderate extremes of price fluctuations. The Fund may invest up to
35% of its portfolio in common stocks of non-U.S. companies, including American
Depository Receipts (which are custody receipts with respect to foreign
securities), in companies in industries which have not been determined to be
attractively valued or moderately attractively valued by the Investment
Manager, and in convertible debt securities and warrants, convertible preferred
securities, U.S. Government securities (securities issued or guaranteed as to
principal and interest by the United States or its agencies and
instrumentalities) and investment grade corporate debt securities when, in the
opinion of the Investment Manager, the projected total return on such
securities is equal to or greater than the expected total return on common
stocks, or when such holdings might be expected to reduce the volatility of the
portfolio, and in money market instruments under any one or more of the
following circumstances: (i) pending investment of proceeds of the sale of Fund
shares or of portfolio securities; (ii) pending settlement of purchases of
portfolio securities; or (iii) to maintain liquidity for the purpose of meeting
anticipated redemptions. Greater than 35% of the Fund's total assets may be
invested in money market instruments to maintain, temporarily, a "defensive"
posture when, in the opinion of the Investment Manager, it is advisable to do
so because of economic or market conditions.
Because prices of stocks fluctuate from day to day, the value of an
investment in the Fund will vary based upon the Fund's investment performance.
The Fund is intended for long-term investors who can accept the risks involved
in seeking long-term growth of capital through investment in the securities of
large, medium and small-capitalization companies. Emphasis on attractive
industries may run contrary to general market assessments and may involve risks
associated with departure from typical S&P 500 industry weightings. It should
be recog-
10
<PAGE>
nized that investing in small and medium-capitalization companies involves
greater risk than is customarily associated with investing in more established
companies.
Convertible Securities. A convertible security is a bond, debenture,
note, preferred stock or other security that may be converted into or exchanged
for a prescribed amount of common stock of the same or a different issuer
within a particular period of time at a specified price or formula. Convertible
securities rank senior to common stocks in a corporation's capital structure
and, therefore, entail less risk than the corporation's common stock. The value
of a convertible security is a function of its "investment value" (its value as
if it did not have a conversion privilege), and its "conversion value" (the
security's worth if it were to be exchanged for the underlying security, at
market value, pursuant to its conversion privilege). For a discussion of the
risks of investing in convertible securities, see "Risk Considerations" below.
The Fund may purchase securities on a when- issued or delayed delivery
basis, may purchase or sell securities on a forward commitment basis and may
purchase securities on a "when, as and if issued" basis as discussed under
"Risk Considerations" below.
OPTIONS AND FUTURES TRANSACTIONS
The Fund may purchase and sell (write) call and put options on debt and
equity securities which are listed on Exchanges or are written in over-the-
counter transactions ("OTC Options"). Listed options, which are currently
listed on several different Exchanges, are issued by the Options Clearing
Corporation ("OCC"). Ownership of a listed call option gives the Fund the right
to buy from the OCC the underlying security covered by the option at the stated
exercise price (the price per unit of the underlying security) by filing an
exercise notice prior to the expiration date of the option. The writer (seller)
of the option would then have the obligation to sell to the OCC the underlying
security at that exercise price prior to the expiration date of the option,
regardless of its then current market price. Ownership of a listed put option
would give the Fund the right to sell the underlying security to the OCC at the
stated exercise price. The Fund will not write covered options on portfolio
securities exceeding in the aggregate 25% of the value of its total assets.
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 transactions only with primary U.S. Government securities
dealers recognized by the Federal Reserve Bank of New York.
Covered Call Writing. The Fund is permitted to write covered call
options on portfolio securities in order to aid it in achieving its investment
objective. As a writer of a call option, the Fund has the obligation, upon
notice of exercise of the option, to deliver the security underlying the option
(certain listed and OTC call options written by the Fund will be exercisable by
the purchaser only on a specific date).
Covered Put Writing. As a writer of covered put options, the Fund incurs
an obligation to buy the security underlying the option from the purchaser of
the put at the option's exercise price at any time during the option period.
The Fund will write put options for two purposes: (1) to receive the premiums
paid by purchasers; and (2) when the Investment Manager wishes to purchase the
security underlying the option at a price lower than its current market price,
in which case it will write the covered put at an exercise price reflecting the
lower purchase price sought.
Purchasing Call and Put Options. The Fund may invest up to 10% of its
total assets in the purchase of put and call options on securities and stock
indexes, with a maximum of 5% of the Fund's total assets invested in stock
index options. The Fund may purchase put options on securities which it holds
(or has the right to acquire) in its portfolio
11
<PAGE>
only to protect itself against a decline in the value of the security. The Fund
may also purchase put options to close out written put positions in a manner
similar to call option closing purchase transactions. There are no other limits
on the Fund's ability to purchase call and put options.
Stock Index Options. The Fund may purchase and write options on stock
indexes for hedging purposes. 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.
See "Risks of Options on Indexes" in the Statement of Additional Information.
Futures Contracts. The Fund may purchase and sell interest rate and
stock index futures contracts ("futures contracts") that are traded on U.S.
commodity exchanges on such underlying securities as U.S. Treasury bonds,
notes, and bills and GNMA Certificates ("interest rate" futures) and such
indexes as the S&P 500 Index and the New York Stock Exchange Composite Index
("stock index" futures) and the Moody's Investment-Grade Corporate Bond Index
("bond index" futures). As a futures contract purchaser, the Fund incurs an
obligation to take delivery of a specified amount of the obligation underlying
the contract at a specified time in the future for a specified price. As a
seller of a futures contract, the Fund incurs an obligation to deliver the
specified amount of the underlying obligation at a specified time in return for
an agreed upon price. The Fund will purchase or sell interest rate futures
contracts and bond index futures contracts for the purpose of hedging its
fixed-income portfolio securities (or anticipated portfolio securities) against
changes in prevailing interest rates. The Fund will purchase or sell stock
index futures contracts for the purpose of hedging its equity portfolio
securities (or anticipated portfolio securities) against changes in their
prices.
The Fund also 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.
Risks of Options and Futures Transactions.
The Fund may close out its position as writer of an option, or as a buyer or
seller of a futures contract only if a liquid secondary market exists for
options or futures contracts of that series. There is no assurance that such a
market will exist. Also, exchanges may limit the amount by which the price of
many futures contracts may move on any day. If the price moves equal the daily
limit on successive days, then it may prove impossible to liquidate a futures
position until the daily limit moves have ceased.
The extent to which the Fund may enter into transactions involving
options and futures contracts may be limited by the Internal Revenue Code's
requirements for qualification as a regulated investment company and the Fund's
intention to qualify as such. See "Dividends, Distributions and Taxes."
While the futures contracts and options transactions to be engaged in by
the Fund for the purpose of hedging the Fund's portfolio securities are not
speculative in nature, there are risks inherent in the use of such instruments.
One such risk is that the Investment Manager could be incorrect in its
expectations as to the direction or extent of various interest rate or price
movements or the time span within which the movements take place. For example,
if the Fund sold futures contracts for the sale of securities in anticipation
of an increase in interest rates, and then interest rates went down, causing
bond prices to rise, the Fund would incur a loss on the sale. Another risk
which may arise in employing futures contracts to protect against the price
volatility of portfolio securities is that the prices of securities and indexes
subject to futures contracts (and thereby the futures contract prices) may
correlate imperfectly with the behavior of the cash prices of the Fund's
portfolio securities. See the Statement of Additional Information for a further
discussion of risks.
New futures contracts, options and other financial products and various
combinations thereof con-
12
<PAGE>
tinue to be developed. The Fund may invest in any such futures, options or
products as may be developed, to the extent consistent with its investment
objective and applicable regulatory requirements.
Investment in Real Estate Investment Trusts.
The Fund may invest in real estate investment trusts, which pool investors'
funds for investments primarily in commercial real estate properties.
Investment in real estate investment trusts may be the most practical available
means for the Fund to invest in the real estate industry (the Fund is
prohibited from investing in real estate directly). As a shareholder in a real
estate investment trust, the Fund would bear its ratable share of the real
estate investment trust's expenses, including its advisory and administration
fees. At the same time the Fund would continue to pay its own investment
management fees and other expenses, as a result of which the Fund and its
shareholders in effect will be absorbing duplicate levels of fees with respect
to investments in real estate investment trusts.
Repurchase Agreements. The Fund may enter into repurchase agreements,
which may be viewed as a type of secured lending by the Fund, and which
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
at a specified price and at a fixed time in the future, usually not more than
seven days from the date of purchase. While repurchase agreements involve
certain risks not associated with direct investments in debt securities,
including the risks of default or bankruptcy of the selling financial
institution, the Fund follows procedures designed to minimize those risks.
These procedures include effecting repurchase transactions only with large,
well-capitalized and well-established financial institutions whose financial
condition will be continually monitored by the Investment Manager subject to
procedures established by the Board of Trustees of the Fund.
Private Placements. The Fund may invest up to 5% of its total assets in
securities which are subject to restrictions on resale because they have not
been registered under the Securities Act of 1933, as amended (the "Securities
Act"), or which are otherwise not readily marketable. (Securities eligible for
resale pursuant to Rule 144A under the Securities Act, and determined to be
liquid pursuant to the procedures discussed in the following paragraph, are not
subject to the foregoing restriction.) These securities are generally referred
to as private placements or restricted securities. Limitations on the resale of
such securities may have an adverse effect on their marketability, and may
prevent the Fund from disposing of them promptly at reasonable prices. The Fund
may have to bear the expense of registering such securities for resale and the
risk of substantial delays in effecting such registration.
Rule 144A under the Securities Act permits the Fund to sell restricted
securities to qualified institutional buyers without limitation. The Investment
Manager, pursuant to procedures adopted by the Trustees of the Fund, 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," such security
will not be included within the category "illiquid securities," which under
current policy 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.
Foreign Securities. The Fund may invest up to 35% of the value of its
total assets, at the time of purchase, in securities issued by foreign issuers.
Foreign securities investments may be affected by changes in currency rates or
exchange control regulations, changes in governmental administration or
economic or monetary policy (in the United States and abroad) or changed
circumstances in dealings between nations. Costs may be incurred in connection
with conversions between various currencies held by the Fund. For a discussion
of the risks of investing in foreign securities, see "Risk Considerations"
below.
13
<PAGE>
SPECIFIC INVESTMENT POLICIES
The Fund has adopted the following specific policies which are not
fundamental investment policies and may be changed by the Board of Trustees.
1. At least 65% of the Fund's total assets will be invested in common
stocks of U.S. companies which, at the time of purchase, were in undervalued or
moderately valued industries as determined by the Investment Manager, except as
stated in Paragraph (3) below.
2. Up to 35% of the value of the Fund's total assets may be invested in:
(a) common stocks of non-U.S. companies, or companies in non-classified
industries, including American Depository Receipts (which are custody receipts
with respect to foreign securities) (the Fund's investments in unlisted foreign
securities are deemed to be illiquid securities, which under the Fund's current
investment policies may not in the aggregate amount to more than 15% of the
Fund's net assets); (b) convertible debt securities (bonds, debentures,
corporate notes, preferred stock and other securities) which are convertible
into common stock; (c) U.S. Government securities and investment grade
corporate debt securities when, in the opinion of the Investment Manager, the
projected total return on such securities is equal to or greater than the
expected total return on equity securities, or when such holdings might be
expected to reduce the volatility of the portfolio; and (d) money market
instruments under any one or more of the following circumstances: (i) pending
investment of proceeds of sale of shares of the Fund or of portfolio
securities; (ii) pending settlement of purchases of portfolio securities; or
(iii) to maintain liquidity for the purpose of meeting anticipated redemptions.
3. Notwithstanding any of the foregoing limitations, the Fund may invest
more than 35% of the Fund's total assets in money market instruments to
maintain, temporarily, a "defensive" posture when, in the opinion of the
Investment Manager, it is advisable to do so because of economic or market
conditions, including, for example, times during which the Investment Manager
believes the risk, or volatility, relative to expected returns of the
securities it monitors, is excessive.
The foregoing limitations apply at the time of acquisition based on the
last determined market value of the Fund's assets, and any subsequent change in
any applicable percentage resulting from market fluctuations or other changes
in total assets will not require elimination of any security from the
portfolio.
RISK CONSIDERATIONS
The net asset value of the Fund's shares will fluctuate with changes in
the market value of its portfolio securities. The market value of the Fund's
portfolio securities will increase or decrease due to a variety of economic,
market or political factors which cannot be predicted. The Fund is intended for
long-term investors who can accept the risks involved in seeking long-term
growth of capital through investment primarily in the securities of small and
medium-sized growth companies. It should be recognized that investing in such
companies involves greater risk than is customarily associated with investing
in more established companies.
Foreign Securities. Foreign securities investments may be affected by
changes in currency rates or exchange control regulations, changes in
governmental administration or economic or monetary policy (in the United
States and abroad) or changed circumstances in dealings between nations.
Fluctuations in the relative rates of exchange between the currencies of
different nations will affect the value of the Fund's investments denominated
in foreign currency. Changes in foreign currency exchange rates relative to the
U.S. dollar will affect the U.S. dollar value of the Fund's assets denominated
in that currency and thereby impact upon the Fund's total return on such
assets. When purchasing foreign securities, the Fund will generally enter into
foreign currency exchange transactions or forward foreign exchange contracts to
facilitate settlement. The Fund will utilize forward foreign exchange contracts
in these instances as an attempt to limit the effect of changes in the
relationship between the U.S. dollar and the foreign currency during the period
between the trade date and settlement date for the transaction.
14
<PAGE>
Foreign currency exchange rates are determined by forces of supply and
demand on the foreign exchange markets. These forces are themselves affected by
the international balance of payments and other economic and financial
conditions, government intervention, speculation and other factors. Moreover,
foreign currency exchange rates may be affected by the regulatory control of
the exchanges on which the currencies trade. The Fund will incur costs in
connection with conversions between various currencies.
Investments in foreign securities will also occasion risks relating to
political and economic developments abroad, including the possibility of
expropriations or confiscatory taxation, limitations on the use or transfer of
Fund assets and any effects of foreign social, economic or political
instability. Foreign companies are not subject to the regulatory requirements
of U.S. companies and, as such, there may be less publicly available
information about such companies. Moreover, foreign companies are not subject
to uniform accounting, auditing and financial reporting standards and
requirements comparable to 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 such
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
American counterparts. Brokerage commissions, dealer concessions and other
transaction costs may be higher on foreign markets than in the U.S. In
addition, differences in clearance and settlement procedures on foreign markets
may occasion delays in settlements of the Fund's trades effected in such
markets. As such, the inability to dispose of portfolio securities due to
settlement delays could result in losses to the Fund due to subsequent declines
in value of such securities and the inability of the Fund to make intended
security purchases due to settlement problems could result in a failure of the
Fund to make potentially advantageous investments. Investments in certain
issuers may be speculative due to certain political risks and may be subject to
substantial price fluctuations.
Convertible Securities. To the extent that a convertible security's
investment value is greater than its conversion value, its price will be
primarily a reflection of such investment value and its price will be likely to
increase when interest rates fall and decrease when interest rates rise, as
with a fixed-income security (the credit standing of the issuer and other
factors may also have an effect on the convertible security's value). If the
conversion value exceeds the investment value, the price of the convertible
security will rise above its investment value and, in addition, the convertible
security will sell at some premium over its conversion value. (This premium
represents the price investors are willing to pay for the privilege of
purchasing a fixed-income security with a possibility of capital appreciation
due to the conversion privilege.) At such times the price of the convertible
security will tend to fluctuate directly with the price of the underlying
equity security.
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,
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
15
<PAGE>
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.
When-Issued and Delayed Delivery Securities and Forward
Commitments. From time to time, in the ordinary course of business, 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 such
transactions are negotiated, the price is fixed at the time of the commitment,
but delivery and payment can take place a month or more after the date of the
commitment. There is no overall limit on the percentage of the Fund's assets
which may be committed to the purchase of securities on a when-issued, delayed
delivery or forward commitment basis. An increase in the percentage of the
Fund's assets committed to the purchase of securities on a when-issued, delayed
delivery or forward commitment basis may increase the volatility of the Fund's
net asset value.
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, leveraged buyout or debt restructuring. If the
anticipated event does not occur and the securities are not issued, the Fund
will have lost an investment opportunity. There is no overall limit on the
percentage of the Fund's assets which may be committed to the purchase of
securities on a "when, as and if issued" basis. An increase in the percentage
of the Fund's assets committed to the purchase of securities on a "when, as and
if issued" basis may increase the volatility of the Fund's net asset value.
Year 2000. The investment management services provided to the Fund by
the Investment Manager and the services provided to shareholders by the
Distributor and the Transfer Agent depend on the smooth functioning of their
computer systems. Many computer software systems in use today cannot recognize
the year 2000, but revert to 1900 or some other date, due to the manner in
which dates were encoded and calculated. That failure could have a negative
impact on the handling of securities trades, pricing and account services. The
Investment Manager, the Distributor and the Transfer Agent have been actively
working on necessary changes to their own computer systems to prepare for the
year 2000 and expect that their systems will be adapted before that date, but
there can be no assurance that they will be successful, or that interaction
with other non-complying computer systems will not impair their services at
that time.
In addition, it is possible that the markets for securities in which the
Fund invests may be detrimentally affected by computer failures throughout the
financial services industry beginning January 1, 2000. Improperly functioning
trading systems may result in settlement problems and liquidity issues. In
addition, corporate and governmental data processing errors may result in
production problems for individual companies and overall economic
uncertainties. Earnings of individual issuers will be affected by remediation
costs, which may be substantial and may be reported inconsistently in U.S. and
foreign financial statements. Accordingly, the Fund's investments may be
adversely affected.
PORTFOLIO MANAGEMENT
The Fund's portfolio is actively managed by its Investment Manager with
a view to achieving the Fund's investment objective. In determining which
securities to purchase for the Fund or hold in the Fund's portfolio, the
Investment Manager will rely on information from various sources, including
research, analysis and appraisals of brokers and dealers, including Dean Witter
Reynolds Inc., Morgan Stanley & Co. Incorporated and other broker--
16
<PAGE>
dealers that are affiliates of the Investment Manager, and others regarding
economic developments and interest rate trends, and the Investment Manager's
own analysis of factors it deems relevant. No particular emphasis is given to
investments in securities for the purpose of earning current income. The Fund's
portfolio is managed within MSDW Advisors' Sector Rotation Group, which manages
5 equity funds and fund portfolios with approximately $6.9 billion in assets as
of July 31, 1998. Anita H. Kolleeny, Senior Vice President of MSDW Advisors and
head of MSDW Advisors' Sector Rotation Group, has been the primary portfolio
manager of the Fund for over five years and is assisted by Michelle Kaufman,
Vice President of MSDW Advisors. Ms. Kolleeny has been a portfolio manager at
MSDW Advisors for over five years. Ms. Kaufman is a member of MSDW Advisors'
Sector Rotation Group and, prior to joining MSDW Advisors in September 1993,
was a securities analyst with Woodward and Associates (March-August, 1993) and
JRO and Associates (December, 1992).
Although the Fund does not engage in substantial short-term trading as a
means of achieving its investment objective, it may sell portfolio securities
without regard to the length of time they have been held, in accordance with
the investment policies described earlier. It is anticipated that, under normal
circumstances, the Fund's portfolio turnover rate will not exceed 400% in any
one year. The Fund will incur brokerage costs commensurate with its portfolio
turnover rate. Short term gains and losses may result from such portfolio
transactions. See "Dividends, Distributions and Taxes" for a discussion of the
tax implications of the Fund's trading policy. A more extensive discussion of
the Fund's portfolio brokerage policies is set forth in the Statement of
Additional Information.
Orders for transactions in portfolio securities and commodities are
placed for the Fund with a number of brokers and dealers, including Dean Witter
Reynolds Inc., Morgan Stanley & Co. Incorporated and other brokers and dealers
that are affiliates of the Investment Manager. The Fund may incur brokerage
commissions on transactions conducted through such affiliates. Pursuant to an
order of the Securities and Exchange Commission the Fund may effect principal
transactions in certain money market instruments with Dean Witter Reynolds Inc.
INVESTMENT RESTRICTIONS
- --------------------------------------------------------------------------------
The investment restrictions listed below are among the restrictions
which have been adopted by the Fund as fundamental policies. Under the
Investment Company Act of 1940, as amended (the "Act"), a fundamental policy
may not be changed without the vote of a majority of the outstanding voting
securities of the Fund, as defined in the Act. For purposes of the following
limitations: (i) all percentage limitations apply immediately after a purchase
or initial investment; and (ii) any subsequent change in any applicable
percentage resulting from market fluctuations or other changes in total or net
assets does not require elimination of any security from the portfolio.
The Fund may not:
1. 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).
2. Purchase more than 10% of all outstanding voting securities or any
class of securities of any one issuer.
3. Invest more than 25% 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 or to cash equivalents.
17
<PAGE>
4. Invest more than 5% of the value of its total assets in securities of
issuers having a record, together with predecessors, of less than three years
of continuous operation. This restriction shall not apply to any obligation of
the United States Government, its agencies or instrumentalities.
Notwithstanding any other investment policy or restriction, 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.
PURCHASE OF FUND SHARES
- --------------------------------------------------------------------------------
GENERAL
The Fund offers each class of its shares for sale to the public on a
continuous basis. Pursuant to a Distribution Agreement between the Fund and
Morgan Stanley Dean Witter Distributors Inc. ("MSDW Distributors" or the
"Distributor"), an affiliate of the Investment Manager, shares of the Fund are
distributed by the Distributor and offered by Dean Witter Reynolds Inc.
("DWR"), a selected dealer and subsidiary of Morgan Stanley Dean Witter & Co.,
and other brokers and dealers which have entered into agreements with the
Distributor ("Selected Broker-Dealers"). It is anticipated that DWR will
undergo a change of corporate name which is expected to incorporate the brand
name of "Morgan Stanley Dean Witter," pending approval of various regulatory
authorities. The principal executive office of the Distributor is located at
Two World Trade Center, New York, New York 10048.
The Fund offers four classes of shares (each, a "Class"). Class A shares
are sold to investors with an initial sales charge that declines to zero for
larger purchases; however, Class A shares sold without an initial sales charge
are subject to a contingent deferred sales charge ("CDSC") of 1.0% if redeemed
within one year of purchase, except for certain specific circumstances. Class B
shares are sold without an initial sales charge but are subject to a CDSC
(scaled down from 5.0% to 1.0%) payable upon most redemptions within six years
after purchase. (Class B shares purchased by certain qualified plans are
subject to a CDSC scaled down from 2.0% to 1.0% if redeemed within three years
after purchase.) Class C shares are sold without an initial sales charge but
are subject to a CDSC of 1.0% on most redemptions made within one year after
purchase. Class D shares are sold without an initial sales charge or CDSC and
are available only to investors meeting an initial investment minimum of $5
million ($25 million for certain qualified plans), and to certain other limited
categories of investors. At the discretion of the Board of Trustees of the
Fund, Class A shares may be sold to categories of investors in addition to
those set forth in this prospectus at net asset value without a front-end sales
charge, and Class D shares may be sold to certain other categories of
investors, in each case as may be described in the then current prospectus of
the Fund. See "Alternative Purchase Arrangements-- Selecting a Particular
Class" for a discussion of factors to consider in selecting which Class of
shares to purchase.
The minimum initial purchase is $1,000 for each Class of shares,
although Class D shares are only available to persons investing $5 million ($25
million for certain qualified plans) or more and to certain other limited
categories of investors. For the purpose of meeting the minimum $5 million (or
$25 million) initial investment for Class D shares, and subject to the $1,000
minimum initial investment for each Class of the Fund, an investor's existing
holdings of Class A shares of the Fund and other Morgan Stanley Dean Witter
Funds that are multiple class funds ("Morgan Stanley Dean Witter Multi-Class
Funds") and shares of Morgan Stanley Dean Witter Funds sold with a front-end
sales charge ("FSC Funds") and concurrent investments in Class D shares of the
Fund and other Morgan Stanley Dean Witter Multi-Class Funds will be aggregated.
Subsequent purchases of $100 or more may be
18
<PAGE>
made by sending a check, payable to Morgan Stanley Dean Witter American Value
Fund, directly to Morgan Stanley Dean Witter Trust FSB (the "Transfer Agent" or
"MSDW Trust") at P.O. Box 1040, Jersey City, NJ 07303 or by contacting a Morgan
Stanley Dean Witter Financial Advisor or other Selected Broker-Dealer
representative of DWR or other Selected Broker-Dealer. When purchasing shares
of the Fund, investors must specify whether the purchase is for Class A, Class
B, Class C or Class D shares. If no Class is specified, the Transfer Agent will
not process the transaction until the proper Class is identified. The minimum
initial purchase in the case of investments through EasyInvestSM, an automatic
purchase plan (see "Shareholder Services"), is $100, provided that the schedule
of automatic investments will result in investments totalling $1,000 within the
first twelve months. The minimum initial purchase in the case of an "Education
IRA" is $500, if the Distributor has reason to believe that additional
investments will increase the investment in the account to $1,000 within three
years. In the case of investments pursuant to (i) Systematic Payroll Deduction
Plans (including Individual Retirement Plans), (ii) the MSDW Advisors mutual
fund asset allocation program and (iii) fee-based programs approved by the
Distributor, pursuant to which participants pay an asset based fee for services
in the nature of investment advisory, administrative and/or brokerage services,
the Fund, in its discretion, may accept investments without regard to any
minimum amounts which would otherwise be required, provided, in the case of
Systematic Payroll Deduction Plans, that the Distributor has reason to believe
that additional investments will increase the investment in all accounts under
such Plans to at least $1,000. Certificates for shares purchased will not be
issued unless requested by the shareholder in writing to the Transfer Agent.
Shares of the Fund are sold through the Distributor on a normal three
business day settlement basis; that is, payment is due on the third business
day (settlement date) after the order is placed with the Distributor. Since DWR
and other Selected Broker-Dealers forward investors' funds on settlement date,
they will benefit from the temporary use of the funds if payment is made prior
thereto. As noted above, orders placed directly with the Transfer Agent must be
accompanied by payment. Investors will be entitled to receive income dividends
and capital gains distributions if their order is received by the close of
business on the day prior to the record date for such distributions. Sales
personnel of a Selected Broker-Dealer are compensated for selling shares of the
Fund at the time of their sale by the Distributor or any of its affiliates
and/or the Selected Broker-Dealer. In addition, some sales personnel of the
Selected Broker-Dealer will receive various types of non-cash compensation as
special sales incentives, including trips, educational and/or business seminars
and merchandise. The Fund and the Distributor reserve the right to reject any
purchase orders.
ALTERNATIVE PURCHASE ARRANGEMENTS
The Fund offers several Classes of shares to investors designed to
provide them with the flexibility of selecting an investment best suited to
their needs. The general public is offered three Classes of shares: Class A
shares, Class B shares and Class C shares, which differ principally in terms of
sales charges and rate of expenses to which they are subject. A fourth Class of
shares, Class D shares, is offered only to limited categories of investors (see
"No Load Alternative--Class D Shares" below).
Each Class A, Class B, Class C or Class D share of the Fund represents
an identical interest in the investment portfolio of the Fund except that Class
A, Class B and Class C shares bear the expenses of the ongoing shareholder
service fees, Class B and Class C shares bear the expenses of the ongoing
distribution fees and Class A, Class B and Class C shares which are redeemed
subject to a CDSC bear the expense of the additional incremental distribution
costs resulting from the CDSC applicable to shares of those Classes. The
ongoing distribution fees that are imposed on Class A, Class B and Class C
shares will be imposed directly
19
<PAGE>
against those Classes and not against all assets of the Fund and, accordingly,
such charges against one Class will not affect the net asset value of any other
Class or have any impact on investors choosing another sales charge option. See
"Plan of Distribution" and "Redemptions and Repurchases."
Set forth below is a summary of the differences between the Classes and
the factors an investor should consider when selecting a particular Class. This
summary is qualified in its entirety by the detailed discussion of each Class
that follows this summary.
Class A Shares. Class A shares are sold at net asset value plus an
initial sales charge of up to 5.25%. The initial sales charge is reduced for
certain purchases. Investments of $1 million or more (and investments by
certain other limited categories of investors) are not subject to any sales
charges at the time of purchase but are subject to a CDSC of 1.0% on
redemptions made within one year after purchase, except for certain specific
circumstances. Class A shares are also subject to a 12b-1 fee of up to 0.25% of
the average daily net assets of the Class. See "Initial Sales Charge
Alternative--Class A Shares."
Class B Shares. Class B shares are offered at net asset value with no
initial sales charge but are subject to a CDSC (scaled down from 5.0% to 1.0%)
if redeemed within six years of purchase. (Class B shares purchased by certain
qualified plans are subject to a CDSC scaled down from 2.0% to 1.0% if redeemed
within three years after purchase.) This CDSC may be waived for certain
redemptions. Class B shares are also subject to an annual 12b-1 fee of 1.0% of
the lesser of: (a) the average daily aggregate gross sales of the Fund's Class
B shares since the inception of the 12b-1 Plan on April 30, 1984 (not including
reinvestments of dividends or capital gains distributions), less the average
daily aggregate net asset value of the Fund's Class B shares redeemed since the
inception of the 12b-1 Plan upon which a CDSC has been imposed or waived, or
(b) the average daily net assets of Class B attributable to shares issued, net
of related shares redeemed, since inception of the 12b-1 Plan. The Class B
shares' distribution fee will cause that Class to have higher expenses and pay
lower dividends than Class A or Class D shares.
After approximately ten (10) years, Class B shares will convert
automatically to Class A shares of the Fund, based on the relative net asset
values of the shares of the two Classes on the conversion date. In addition, a
certain portion of Class B shares that have been acquired through the
reinvestment of dividends and distributions will be converted at that time. See
"Contingent Deferred Sales Charge Alternative--Class B Shares."
Class C Shares. Class C shares are sold at net asset value with no
initial sales charge but are subject to a CDSC of 1.0% on redemptions made
within one year after purchase. This CDSC may be waived for certain
redemptions. They are subject to an annual 12b-1 fee of up to 1.0% of the
average daily net assets of the Class C shares. The Class C shares'
distribution fee may cause that Class to have higher expenses and pay lower
dividends than Class A or Class D shares. See "Level Load Alternative--Class C
Shares."
Class D Shares. Class D shares are available only to limited categories
of investors (see "No Load Alternative--Class D Shares" below). Class D shares
are sold at net asset value with no initial sales charge or CDSC. They are not
subject to any 12b-1 fees. See "No Load Alternative--Class D Shares."
Selecting a Particular Class. In deciding which Class of Fund shares to
purchase, investors should consider the following factors, as well as any other
relevant facts and circumstances:
The decision as to which Class of shares is more beneficial to an
investor depends on the amount and intended length of his or her investment.
Investors who prefer an initial sales charge alternative may elect to purchase
Class A shares. Investors qualifying for significantly reduced or, in the case
of purchases of $1 million or more, no initial sales charges may find Class A
shares particularly attractive because similar sales charge reductions
20
<PAGE>
are not available with respect to Class B or Class C shares. Moreover, Class A
shares are subject to lower ongoing expenses than are Class B or Class C shares
over the term of the investment. As an alternative, Class B and Class C shares
are sold without any initial sales charge so the entire purchase price is
immediately invested in the Fund. Any investment return on these additional
investment amounts may partially or wholly offset the higher annual expenses of
these Classes. Because the Fund's future return cannot be predicted, however,
there can be no assurance that this would be the case.
Finally, investors should consider the effect of the CDSC period and any
conversion rights of the Classes in the context of their own investment time
frame. For example, although Class C shares are subject to a significantly
lower CDSC upon redemptions, they do not, unlike Class B shares, convert into
Class A shares after approximately ten years, and, therefore, are subject to an
ongoing 12b-1 fee of 1.0% (rather than the 0.25% fee applicable to Class A
shares) for an indefinite period of time. Thus, Class B shares may be more
attractive than Class C shares to investors with longer term investment
outlooks. Other investors, however, may elect to purchase Class C shares if,
for example, they determine that they do not wish to be subject to a front-end
sales charge and they are uncertain as to the length of time they intend to
hold their shares.
For the purpose of meeting the $5 million (or $25 million) minimum
investment amount for Class D shares, holdings of Class A shares in all Morgan
Stanley Dean Witter Multi-Class Funds, shares of FSC Funds and shares of Morgan
Stanley Dean Witter Funds for which such shares have been exchanged will be
included together with the current investment amount.
Sales personnel may receive different compensation for selling each
Class of shares. Investors should understand that the purpose of a CDSC is the
same as that of the initial sales charge in that the sales charges applicable
to each Class provide for the financing of the distribution of shares of that
Class.
Set forth below is a chart comparing the sales charge, 12b-1 fees and
conversion options applicable to each Class of shares:
<TABLE>
<CAPTION>
CONVERSION
CLASS SALES CHARGE 12B-1 FEE FEATURE
- -------- ------------------------ ----------- -------------------
<S> <C> <C> <C>
- -----------------------------------------------------------------------
A Maximum 5.25% 0.25% No
initial sales charge
reduced for
purchases of
$25,000 and over;
shares sold without
an initial sales
charge generally
subject to a 1.0%
CDSC during first
year.
- -----------------------------------------------------------------------
B Maximum 5.0% 1.0% B shares convert
CDSC during the first to A shares
year decreasing automatically
to 0 after six years after
approximately
ten years
- ------------------------------------------------------------------------
C 1.0% CDSC during 1.0% No
first year
- ------------------------------------------------------------------------
D None None No
</TABLE>
See "Purchase of Fund Shares" and "The Fund and its Management" for a
complete description of the sales charges and service and distribution fees for
each Class of shares and "Determination of Net Asset Value," "Dividends,
Distributions and Taxes" and "Shareholder Services--Exchange Privilege" for
other differences between the Classes of shares.
INITIAL SALES CHARGE ALTERNATIVE--CLASS A SHARES
Class A shares are sold at net asset value plus an initial sales charge.
In some cases, reduced sales charges may be available, as described below.
Investments of $1 million or more (and investments by certain other limited
categories of investors) are not subject to any sales charges at the time of
purchase but are subject to a CDSC of 1.0% on redemptions made within one year
after purchase (calculated from the last day of the month in which the shares
were purchased), except for certain specific circumstances. The CDSC will be
assessed on an amount equal to the lesser of the current market value or the
cost of the shares being re-
21
<PAGE>
deemed. The CDSC will not be imposed (i) in the circumstances set forth below
in the section "Contingent Deferred Sales Charge Alternative--Class B
Shares--CDSC Waivers," except that the references to six years in the first
paragraph of that section shall mean one year in the case of Class A shares,
and (ii) in the circumstances identified in the section "Additional Net Asset
Value Purchase Options" below. Class A shares are also subject to an annual
12b-1 fee of up to 0.25% of the average daily net assets of the Class.
The offering price of Class A shares will be the net asset value per
share next determined following receipt of an order (see "Determination of Net
Asset Value" below), plus a sales charge (expressed as a percentage of the
offering price) on a single transaction as shown in the following table:
<TABLE>
<CAPTION>
SALES CHARGE
------------------------------------
PERCENTAGE OF APPROXIMATE
AMOUNT OF SINGLE PUBLIC OFFERING PERCENTAGE OF
TRANSACTION PRICE AMOUNT INVESTED
- ----------------------------- ----------------- ----------------
<S> <C> <C>
Less than $25,000 ........... 5.25% 5.54%
$25,000 but less
than $50,000 ............. 4.75% 4.99%
$50,000 but less
than $100,000 ............ 4.00% 4.17%
$100,000 but less
than $250,000 ............ 3.00% 3.09%
$250,000 but less
than $1 million .......... 2.00% 2.04%
$1 million and over ......... 0 0
</TABLE>
Upon notice to all Selected Broker-Dealers, the Distributor may reallow
up to the full applicable sales charge as shown in the above schedule during
periods specified in such notice. During periods when 90% or more of the sales
charge is reallowed, such Selected Broker-Dealers may be deemed to be
underwriters as that term is defined in the Securities Act of 1933.
The above schedule of sales charges is applicable to purchases in a
single transaction by, among others: (a) an individual; (b) an individual, his
or her spouse and their children under the age of 21 purchasing shares for his,
her or their own accounts; (c) a trustee or other fiduciary purchasing shares
for a single trust estate or a single fiduciary account; (d) a pension,
profit-sharing or other employee benefit plan qualified or non-qualified under
Section 401 of the Internal Revenue Code; (e) tax-exempt organizations
enumerated in Section 501(c)(3) or (13) of the Internal Revenue Code; (f)
employee benefit plans qualified under Section 401 of the Internal Revenue Code
of a single employer or of employers who are "affiliated persons" of each other
within the meaning of Section 2(a)(3)(c) of the Act; and for investments in
Individual Retirement Accounts of employees of a single employer through
Systematic Payroll Deduction plans; or (g) any other organized group of
persons, whether incorporated or not, provided the organization has been in
existence for at least six months and has some purpose other than the purchase
of redeemable securities of a registered investment company at a discount.
Combined Purchase Privilege. Investors may have the benefit of reduced
sales charges in accordance with the above schedule by combining purchases of
Class A shares of the Fund in single transactions with the purchase of Class A
shares of other Morgan Stanley Dean Witter Multi-Class Funds and shares of FSC
Funds. The sales charge payable on the purchase of the Class A shares of the
Fund, the Class A shares of the other Morgan Stanley Dean Witter Multi-Class
Funds and the shares of the FSC Funds will be at their respective rates
applicable to the total amount of the combined concurrent purchases of such
shares.
Right of Accumulation. The above persons and entities may benefit from a
reduction of the sales charges in accordance with the above schedule if the
cumulative net asset value of Class A shares purchased in a single transaction,
together with shares of the Fund and other Morgan Stanley Dean Witter Funds
previously purchased at a price including a front-end sales charge (including
shares of the Fund and other Morgan Stanley Dean Witter Funds acquired in
exchange for those shares, and including in each case shares acquired through
reinvestment of dividends and distributions), which are held at the time of
such transaction, amounts to $25,000 or more. If such investor has a cumulative
22
<PAGE>
net asset value of shares of FSC Funds and Class A and Class D shares that,
together with the current investment amount, is equal to at least $5 million
($25 million for certain qualified plans), such investor is eligible to
purchase Class D shares subject to the $1,000 minimum initial investment
requirement of that Class of the Fund. See "No Load Alternative--Class D
Shares" below.
The Distributor must be notified by DWR or a Selected Broker-Dealer or
the shareholder at the time a purchase order is placed that the purchase
qualifies for the reduced charge under the Right of Accumulation. Similar
notification must be made in writing by the dealer or shareholder when such an
order is placed by mail. The reduced sales charge will not be granted if: (a)
such notification is not furnished at the time of the order; or (b) a review of
the records of the Selected Broker-Dealer or the Transfer Agent fails to
confirm the investor's represented holdings.
Letter of Intent. The foregoing schedule of reduced sales charges will
also be available to investors who enter into a written Letter of Intent
providing for the purchase, within a thirteen-month period, of Class A shares
of the Fund from DWR or other Selected Broker-Dealers. The cost of Class A
shares of the Fund or shares of other Morgan Stanley Dean Witter Funds which
were previously purchased at a price including a front-end sales charge during
the 90-day period prior to the date of receipt by the Distributor of the Letter
of Intent, or of Class A shares of the Fund or shares of other Morgan Stanley
Dean Witter Funds acquired in exchange for shares of such funds purchased
during such period at a price including a front-end sales charge, which are
still owned by the shareholder, may also be included in determining the
applicable reduction.
Additional Net Asset Value Purchase Options. In addition to investments
of $1 million or more, Class A shares also may be purchased at net asset value
by the following:
(1) trusts for which MSDW Trust (an affiliate of the Investment Manager)
provides discretionary trustee services;
(2) persons participating in a fee-based program approved by the
Distributor, pursuant to which such persons pay an asset based fee for services
in the nature of investment advisory, administrative and/or brokerage services
(such investments are subject to all of the terms and conditions of such
programs, which may include termination fees, mandatory redemption upon
termination and such other circumstances as specified in the programs'
agreements, and restrictions on transferability of Fund shares);
(3) employer-sponsored 401(k) and other plans qualified under Section
401(a) of the Internal Revenue Code ("Qualified Retirement Plans") with at
least 200 eligible employees and for which MSDW Trust serves as Trustee or
DWR's Retirement Plan Services serves as recordkeeper pursuant to a written
Recordkeeping Services Agreement;
(4) Qualified Retirement Plans for which MSDW Trust serves as Trustee or
DWR's Retirement Plan Services serves as recordkeeper pursuant to a written
Recordkeeping Services Agreement whose Class B shares have converted to Class A
shares, regardless of the plan's asset size or number of eligible employees;
(5) investors who are clients of a Morgan Stanley Dean Witter Financial
Advisor who joined Morgan Stanley Dean Witter from another investment firm
within six months prior to the date of purchase of Fund shares by such
investors, if the shares are being purchased with the proceeds from a
redemption of shares of an open-end proprietary mutual fund of the Financial
Advisor's previous firm which imposed either a front-end or deferred sales
charge, provided such purchase was made within sixty days after the redemption
and the proceeds of the redemption had been maintained in the interim in cash
or a money market fund; and
(6) other categories of investors, at the discretion of the Board, as
disclosed in the then current prospectus of the Fund.
No CDSC will be imposed on redemptions of shares purchased pursuant to
paragraphs (1), (2) or (5), above.
23
<PAGE>
For further information concerning purchases of the Fund's shares,
contact DWR or another Se-lected Broker-Dealer or consult the Statement of
Additional Information.
CONTINGENT DEFERRED SALES CHARGE ALTERNATIVE--
CLASS B SHARES
Class B shares are sold at net asset value next determined without an
initial sales charge so that the full amount of an investor's purchase payment
may be immediately invested in the Fund. A CDSC, however, will be imposed on
most Class B shares redeemed within six years after purchase. The CDSC will be
imposed on any redemption of shares if after such redemption the aggregate
current value of a Class B account with the Fund falls below the aggregate
amount of the investor's purchase payments for Class B shares made during the
six years (or, in the case of shares held by certain Qualified Retirement
Plans, three years) preceding the redemption. In addition, Class B shares are
subject to an annual 12b-1 fee of 1.0% of the lesser of: (a) the average daily
aggregate gross sales of the Fund's Class B shares since the implementation of
the 12b-1 Plan on April 30, 1984 (not including reinvestments of dividends or
capital gains distributions), less the average daily aggregate net asset value
of the Fund's Class B shares redeemed since the implementation of the 12b-1
Plan upon which a CDSC has been imposed or waived, or (b) the average daily net
assets of Class B attributable to shares issued, net of related shares
redeemed, since implementation of the 12b-1 Plan.
Except as noted below, Class B shares of the Fund which are held for six
years or more after purchase (calculated from the last day of the month in
which the shares were purchased) will not be subject to any CDSC upon
redemption. Shares redeemed earlier than six years after purchase may, however,
be subject to a CDSC which will be a percentage of the dollar amount of shares
redeemed and will be assessed on an amount equal to the lesser of the current
market value or the cost of the shares being redeemed. The size of this
percentage will depend upon how long the shares have been held, as set forth in
the following table:
<TABLE>
<CAPTION>
YEAR SINCE
PURCHASE CDSC AS A PERCENTAGE
PAYMENT MADE OF AMOUNT REDEEMED
- -------------------------------- ---------------------
<S> <C>
First .......................... 5.0%
Second ......................... 4.0%
Third .......................... 3.0%
Fourth ......................... 2.0%
Fifth .......................... 2.0%
Sixth .......................... 1.0%
Seventh and thereafter ......... None
</TABLE>
In the case of Class B shares of the Fund purchased on or after July 28,
1997 by Qualified Retirement Plans for which MSDW Trust serves as Trustee or
DWR's Retirement Plan Services serves as recordkeeper pursuant to a written
Recordkeeping Services Agreement, shares held for three years or more after
purchase (calculated as described in the paragraph above) will not be subject
to any CDSC upon redemption. However, shares redeemed earlier than three years
after purchase may be subject to a CDSC (calculated as described in the
paragraph above), the percentage of which will depend on how long the shares
have been held, as set forth in the following table:
<TABLE>
<CAPTION>
YEAR SINCE
PURCHASE CDSC AS A PERCENTAGE
PAYMENT MADE OF AMOUNT REDEEMED
- ------------------------------- ---------------------
<S> <C>
First ......................... 2.0%
Second ........................ 2.0%
Third ......................... 1.0%
Fourth and thereafter ......... None
</TABLE>
CDSC Waivers. A CDSC will not be imposed on: (i) any amount which
represents an increase in value of shares purchased within the six years (or,
in the case of shares held by certain Qualified Retirement Plans, three years)
preceding the redemption; (ii) the current net asset value of shares purchased
more than six years (or, in the case of shares held by certain Qualified
Retirement Plans, three years) prior to the redemption; and (iii) the current
net asset value of shares purchased through reinvestment of dividends or
distributions and/or shares acquired in exchange for shares of FSC Funds or of
other Morgan Stanley Dean Witter Funds acquired in
24
<PAGE>
exchange for such shares. Moreover, in determining whether a CDSC is applicable
it will be assumed that amounts described in (i), (ii) and (iii) above (in that
order) are redeemed first.
In addition, the CDSC, if otherwise applicable, will be waived in the
case of:
(1) redemptions of shares held at the time a shareholder dies or becomes
disabled, only if the shares are: (A) registered either in the name of an
individual shareholder (not a trust), or in the names of such shareholder and
his or her spouse as joint tenants with right of survivorship; or (B) held in
a qualified corporate or self-employed retirement plan, Individual Retirement
Account ("IRA") or Custodial Account under Section 403(b)(7) of the Internal
Revenue Code ("403(b) Custodial Account"), provided in either case that the
redemption is requested within one year of the death or initial determination
of disability;
(2) redemptions in connection with the following retirement plan
distributions: (A) lump-sum or other distributions from a qualified corporate
or self-employed retirement plan following retirement (or, in the case of a
"key employee" of a "top heavy" plan, following attainment of age 59 1/2);
(B) distributions from an IRA or 403(b) Custodial Account following
attainment of age 59 1/2; or (C) a tax-free return of an excess contribution
to an IRA; and
(3) all redemptions of shares held for the benefit of a participant in a
Qualified Retirement Plan which offers investment companies managed by the
Investment Manager or its subsidiary, MSDW Services, as self-directed
investment alternatives and for which MSDW Trust serves as Trustee or DWR's
Retirement Plan Services serves as recordkeeper pursuant to a written
Recordkeeping Services Agreement ("Eligible Plan"), provided that either: (A)
the plan continues to be an Eligible Plan after the redemption; or (B) the
redemption is in connection with the complete termination of the plan involving
the distribution of all plan assets to participants.
With reference to (1) above, for the purpose of determining disability,
the Distributor utilizes the definition of disability contained in Section
72(m)(7) of the Internal Revenue Code, which relates to the inability to engage
in gainful employment. With reference to (2) above, the term "distribution"
does not encompass a direct transfer of IRA, 403(b) Custodial Account or
retirement plan assets to a successor custodian or trustee. All waivers will be
granted only following receipt by the Distributor of confirmation of the
shareholder's entitlement.
Conversion to Class A Shares. All shares of the Fund held prior to July
28, 1997, other than shares which were purchased prior to April 30, 1984 (and,
with respect to such shares, including such proportion of shares acquired
through reinvestment of dividends and capital gains distributions as the total
number of shares acquired prior to such date bears to the total number of Fund
shares purchased and owned by the shareholder (collectively, the "Old Shares"),
have been designated Class B shares. Shares held before May 1, 1997 that have
been designated Class B shares will convert to Class A shares in May, 2007. In
all other instances Class B shares will convert automatically to Class A
shares, based on the relative net asset values of the shares of the two Classes
on the conversion date, which will be approximately ten (10) years after the
date of the original purchase. The ten year period is calculated from the last
day of the month in which the shares were purchased or, in the case of Class B
shares acquired through an exchange or a series of exchanges, from the last day
of the month in which the original Class B shares were purchased, provided that
shares originally purchased before May 1, 1997 will convert to Class A shares
in May, 2007. The conversion of shares purchased on or after May 1, 1997 will
take place in the month following the tenth anniversary of the purchase. There
will also be converted at that time such proportion of Class B shares acquired
through automatic reinvestment of dividends and distributions owned by the
shareholder as the total number of his or her Class B shares converting at the
time bears to the total number of outstanding Class B shares purchased and
owned by the shareholder. In the case of Class B shares held by a Qualified
Retirement Plan for
25
<PAGE>
which MSDW Trust serves as Trustee or DWR's Retirement Plan Services serves as
recordkeeper pursuant to a written Recordkeeping Services Agreement, the plan
is treated as a single investor and all Class B shares will convert to Class A
shares on the conversion date of the first shares of a Morgan Stanley Dean
Witter Multi-Class Fund purchased by that plan. In the case of Class B shares
previously exchanged for shares of an "Exchange Fund" (see "Shareholder
Services--Exchange Privilege"), the period of time the shares were held in the
Exchange Fund (calculated from the last day of the month in which the Exchange
Fund shares were acquired) is excluded from the holding period for conversion.
If those shares are subsequently re-exchanged for Class B shares of a Morgan
Stanley Dean Witter Multi-Class Fund, the holding period resumes on the last
day of the month in which Class B shares are reacquired.
If a shareholder has received share certificates for Class B shares,
such certificates must be delivered to the Transfer Agent at least one week
prior to the date for conversion. Class B shares evidenced by share
certificates that are not received by the Transfer Agent at least one week
prior to any conversion date will be converted into Class A shares on the next
scheduled conversion date after such certificates are received.
Effectiveness of the conversion feature is subject to the continuing
availability of a ruling of the Internal Revenue Service or an opinion of
counsel that (i) the conversion of shares does not constitute a taxable event
under the Internal Revenue Code, (ii) Class A shares received on conversion
will have a basis equal to the shareholder's basis in the converted Class B
shares immediately prior to the conversion, and (iii) Class A shares received
on conversion will have a holding period that includes the holding period of
the converted Class B shares. The conversion feature may be suspended if the
ruling or opinion is no longer available. In such event, Class B shares would
continue to be subject to Class B 12b-1 fees.
LEVEL LOAD ALTERNATIVE--CLASS C SHARES
Class C shares are sold at net asset value next determined without an
initial sales charge but are subject to a CDSC of 1.0% on most redemptions made
within one year after purchase (calculated from the last day of the month in
which the shares were purchased). The CDSC will be assessed on an amount equal
to the lesser of the current market value or the cost of the shares being
redeemed. The CDSC will not be imposed in the circumstances set forth above in
the section "Contingent Deferred Sales Charge Alternative--Class B Shares--CDSC
Waivers," except that the references to six years in the first paragraph of
that section shall mean one year in the case of Class C shares. Class C shares
are subject to an annual 12b-1 fee of up to 1.0% of the average daily net
assets of the Class. Unlike Class B shares, Class C shares have no conversion
feature and, accordingly, an investor that purchases Class C shares will be
subject to 12b-1 fees applicable to Class C shares for an indefinite period
subject to annual approval by the Fund's Board of Trustees and regulatory
limitations.
NO LOAD ALTERNATIVE--CLASS D SHARES
Class D shares are offered without any sales charge on purchase or
redemption and without any 12b-1 fee. Class D shares are offered only to
investors meeting an initial investment minimum of $5 million ($25 million for
Qualified Retirement Plans for which MSDW Trust serves as Trustee or DWR's
Retirement Plan Services serves as recordkeeper pursuant to a written
Recordkeeping Services Agreement) and the following categories of investors:
(i) investors participating in the MSDW Advisors mutual fund asset allocation
program pursuant to which such persons pay an asset based fee; (ii) persons
participating in a fee-based program approved by the Distributor, pursuant to
which such persons pay an asset based fee for services in the nature of
investment advisory, administrative and/or brokerage services (subject to all
of the terms and conditions of such programs, referred to in (i) and (ii)
above, which may include termination fees, mandatory redemption upon
termination and such other circumstances as specified in the programs'
agreements, and restrictions on transferability of Fund shares); (iii) 401(k)
plans established by DWR and SPS Transaction Services, Inc. (an affiliate of
DWR) for their employees; (iv) certain Unit Investment
26
<PAGE>
Trusts sponsored by DWR; (v) certain other open-end investment companies whose
shares are distributed by the Distributor; and (vi) other categories of
investors, at the discretion of the Board, as disclosed in the then current
prospectus of the Fund. The Old Shares have been designated Class D shares.
Investors who require a $5 million (or $25 million) minimum initial investment
to qualify to purchase Class D shares may satisfy that requirement by investing
that amount in a single transaction in Class D shares of the Fund and other
Morgan Stanley Dean Witter Multi-Class Funds, subject to the $1,000 minimum
initial investment required for that Class of the Fund. In addition, for the
purpose of meeting the $5 million (or $25 million) minimum investment amount,
holdings of Class A shares in all Morgan Stanley Dean Witter Multi-Class Funds,
shares of FSC Funds and shares of Morgan Stanley Dean Witter Funds for which
such shares have been exchanged will be included together with the current
investment amount. If a shareholder redeems Class A shares and purchases Class
D shares, such redemption may be a taxable event.
PLAN OF DISTRIBUTION
The Fund has adopted a Plan of Distribution pursuant to Rule 12b-1 under
the Act with respect to the distribution of Class A, Class B and Class C shares
of the Fund. In the case of Class A and Class C shares, the Plan provides that
the Fund will reimburse the Distributor and others for the expenses of certain
activities and services incurred by them specifically on behalf of those
shares. Reimbursements for these expenses will be made in monthly payments by
the Fund to the Distributor, which will in no event exceed amounts equal to
payments at the annual rates of 0.25% and 1.0% of the average daily net assets
of Class A and Class C, respectively. In the case of Class B shares, the Plan
provides that the Fund will pay the Distributor a fee, which is accrued daily
and paid monthly, at the annual rate of 1.0% of the lesser of: (a) the average
daily aggregate gross sales of the Fund's Class B shares since the
implementation of the 12b-1 Plan on April 30, 1984 (not including reinvestments
of dividends or capital gains distributions), less the average daily aggregate
net asset value of the Fund's Class B shares redeemed since that Plan's
implementation upon which a CDSC has been imposed or waived, or (b) the average
daily net assets of Class B attributable to shares issued, net of related
shares redeemed, since implementation of the Fund's 12b-1 Plan. The fee is
treated by the Fund as an expense in the year it is accrued. In the case of
Class A shares, the entire amount of the fee currently represents a service fee
within the meaning of the NASD guidelines. In the case of Class B and Class C
shares, a portion of the fee payable pursuant to the Plan, equal to 0.25% of
the average daily net assets of each of these Classes, is currently
characterized as a service fee. A service fee is a payment made for personal
service and/or the maintenance of shareholder accounts.
Additional amounts paid under the Plan in the case of Class B and Class
C shares are paid to the Distributor for services provided and the expenses
borne by the Distributor and others in the distribution of the shares of those
Classes, including the payment of commissions for sales of the shares of those
Classes and incentive compensation to and expenses of Morgan Stanley Dean
Witter Financial Advisors and others who engage in or support distribution of
shares or who service shareholder accounts, including overhead and telephone
expenses; printing and distribution of prospectuses and reports used in
connection with the offering of the Fund's shares to other than current
shareholders; and preparation, printing and distribution of sales literature
and advertising materials. In addition, the Distributor may utilize fees paid
pursuant to the Plan in the case of Class B shares to compensate DWR and other
Selected Broker-Dealers for their opportunity costs in advancing such amounts,
which compensation would be in the form of a carrying charge on any
unreimbursed expenses.
For the fiscal year ended December 31, 1997, Class B shares of the Fund
accrued payments under the Plan amounting to $30,004,099, which amount is equal
to 0.83% of the average daily net assets of Class B for the fiscal year. These
payments were calculated pursuant to clause (a) of the compensation formula
under the Plan. All shares
27
<PAGE>
held prior to July 28, 1997 (other than the Old Shares) have been designated
Class B shares. For the fiscal period July 28 through December 31, 1997, Class
A and Class C shares of the Fund accrued payments under the Plan amounting to
$7,380 and $26,712, respectively, which amounts on an annualized basis are
equal to 0.25% and 1.00% of the average daily net assets of Class A and Class
C, respectively, for such period.
In the case of Class B shares, at any given time, the expenses in
distributing Class B shares of the Fund may be in excess of the total of (i)
the payments made by the Fund pursuant to the Plan, and (ii) the proceeds of
CDSCs paid by investors upon the redemption of Class B 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 such excess amounts, including the carrying charge described above,
totalled $72,540,376 at December 31, 1997, which was equal to 1.78% 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 or any
requirement that the Plan be continued from year to year, such 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 in any subsequent year, except that expenses representing a gross sales
commission credited to Morgan Stanley Dean Witter Financial Advisors and other
Selected Broker-Dealer Representatives at the time of sale may be reimbursed in
the subsequent calendar year. The Distributor has advised the Fund that
unreimbursed expenses representing a gross sales commission credited to Morgan
Stanley Dean Witter Financial Advisor and other Selected Broker-Dealer
representatives at the time of sale totalled $92,652 in the case of Class C at
December 31, 1997, which amount was equal to 0.76% of the net assets of Class C
on such date, and that there were no such expenses that may be reimbursed in
the subsequent year in the case of Class A on such date. No interest or other
financing charges will be incurred on any Class A or Class C distribution
expenses incurred by the Distributor under the Plan or on any unreimbursed
expenses due to the Distributor pursuant to the Plan.
DETERMINATION OF NET ASSET VALUE
The net asset value per share is determined once daily at 4:00 p.m., New
York time (or, on days when the New York Stock Exchange closes prior to 4:00
p.m., at such earlier time), by taking the net assets of the Fund, dividing by
the number of shares outstanding and adjusting to the nearest cent. The assets
belonging to the Class A, Class B, Class C and Class D shares will be invested
together in a single portfolio. The net asset value of each Class, however,
will be determined separately by subtracting each Class's accrued expenses and
liabilities. The net asset value per share will not be determined on Good
Friday and on such other federal and non-federal holidays as are observed by
the New York Stock Exchange.
In the calculation of the Fund's net asset value: (1) an equity
portfolio security listed or traded on the New York or American Stock Exchange
or other stock exchange is valued at its latest sale price on that exchange,
prior to the time 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
28
<PAGE>
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 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 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. Dividends receivable are accrued as of the ex-dividend date or
as of the time that the relevant ex-dividend date and amounts become known.
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 securities in the Fund's portfolio 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.
SHAREHOLDER SERVICES
- --------------------------------------------------------------------------------
Automatic Investment of Dividends and Distributions. All income
dividends and capital gains distributions are automatically paid in full and
fractional shares of the applicable Class of the Fund (or, if specified by the
shareholder, in shares of any other open-end Morgan Stanley Dean Witter Fund),
unless the shareholder requests that they be paid in cash. Shares so acquired
are acquired at net asset value and are not subject to the imposition of a
front-end sales charge or CDSC (see "Redemptions and Repurchases").
EasyInvest.SM Shareholders may subscribe to EasyInvest, an automatic
purchase plan which provides for any amount from $100 to $5,000 to be
transferred automatically from a checking or savings account, or following
redemption of shares of a Morgan Stanley Dean Witter money market fund, on a
semi-monthly, monthly or quarterly basis, to the Transfer Agent for investment
in shares of the Fund (see "Purchase of Fund Shares" and "Redemptions and
Repurchases --Involuntary Redemption").
Investment of Dividends or Distributions Received in Cash. Any
shareholder who receives a cash payment representing a dividend or capital
gains distribution may invest such dividend or distribution in shares of the
applicable Class at the net asset value next determined after receipt by the
Transfer Agent, by returning the check or the proceeds to the Transfer Agent
within thirty days after the payment date. Shares so acquired are acquired at
net asset value and are not subject to the imposition of a front-end sales
charge or a CDSC (see "Redemptions and Repurchases").
Systematic Withdrawal Plan. A systematic withdrawal plan (the
"Withdrawal Plan") is available for shareholders who own or purchase shares of
the Fund having a minimum value of $10,000 based upon the then current net
asset value. The Withdrawal Plan provides for monthly or quarterly (March,
June, September and December) checks in any amount, not less than $25, or in
any whole percentage of the account balance, on an annualized basis. Any
applicable CDSC will be imposed on shares redeemed under the Withdrawal Plan
(see "Purchase of Fund Shares"). Therefore, any shareholder
29
<PAGE>
participating in the Withdrawal Plan will have sufficient shares redeemed from
his or her account so that the proceeds (net of any applicable CDSC) to the
shareholder will be the designated monthly or quarterly amount. Withdrawal plan
payments should not be considered as dividends, yields or income. If periodic
withdrawal plan payments continuously exceed net investment income and net
capital gains, the shareholder's original investment will be correspondingly
reduced and ultimately exhausted. Each withdrawal constitutes a redemption of
shares and any gain or loss realized must be recognized for federal income tax
purposes.
Shareholders should contact their Morgan Stanley Dean Witter Financial
Advisor or other Selected Broker-Dealer representative or the Transfer Agent
for further information about any of the above services.
Tax-Sheltered Retirement Plans. Retirement plans are available for use
by corporations, the self- employed, Individual Retirement Accounts and
Custodial Accounts under Section 403(b)(7) of the Internal Revenue Code.
Adoption of such plans should be on advice of legal counsel or tax advisor.
For further information regarding plan administration, custodial fees
and other details, investors should contact their Morgan Stanley Dean Witter
Financial Advisor or other Selected Broker-Dealer representative or the
Transfer Agent.
EXCHANGE PRIVILEGE
Shares of each Class may be exchanged for shares of the same Class of
any other Morgan Stanley Dean Witter Multi-Class Fund without the imposition of
any exchange fee. Shares may also be exchanged for shares of the following
funds: Morgan Stanley Dean Witter Short-Term U.S. Treasury Trust, Morgan
Stanley Dean Witter Limited Term Municipal Trust, Morgan Stanley Dean Witter
Short-Term Bond Fund and five Morgan Stanley Dean Witter funds which are money
market funds (the "Exchange Funds"). Class A shares may also be exchanged for
shares of Morgan Stanley Dean Witter Multi-State Municipal Series Trust and
Morgan Stanley Dean Witter Hawaii Municipal Trust, which are Morgan Stanley
Dean Witter Funds sold with a front-end sales charge ("FSC Funds"). Class B
shares may also be exchanged for shares of Morgan Stanley Dean Witter Global
Short-Term Income Fund Inc. ("Global Short-Term"), which is a Morgan Stanley
Dean Witter Fund offered with a CDSC. Exchanges may be made after the shares of
the Fund acquired by purchase (not by exchange or dividend reinvestment) have
been held for thirty days. There is no waiting period for exchanges of shares
acquired by exchange or dividend reinvestment.
An exchange to another Morgan Stanley Dean Witter Multi-Class Fund, any
FSC Fund, Global Short-Term or any Exchange Fund that is not a money market
fund is on the basis of the next calculated net asset value per share of each
fund after the exchange order is received. When exchanging into a money market
fund from the Fund, shares of the Fund are redeemed out of the Fund at their
next calculated net asset value and the proceeds of the redemption are used to
purchase shares of the money market fund at their net asset value determined
the following business day. Subsequent exchanges between any of the money
market funds and any of the Morgan Stanley Dean Witter Multi-Class Funds, FSC
Funds, Global Short-Term or any Exchange Fund that is not a money market fund
can be effected on the same basis.
No CDSC is imposed at the time of any exchange of shares, although any
applicable CDSC will be imposed upon ultimate redemption. During the period of
time the shareholder remains in an Exchange Fund (calculated from the last day
of the month in which the Exchange Fund shares were acquired), the holding
period (for the purpose of determining the rate of the CDSC) is frozen. If
those shares are subsequently re-exchanged for shares of a Morgan Stanley Dean
Witter Multi-Class Fund or shares of Global Short-Term, the holding period
previously frozen when the first exchange was made resumes on the last day of
the month in which shares of a Morgan Stanley Dean Witter Multi-Class Fund or
shares of Global Short-Term are reacquired. Thus, the CDSC is based upon the
time
30
<PAGE>
(calculated as described above) the shareholder was invested in shares of a
Morgan Stanley Dean Witter Multi-Class Fund or in shares of Global Short-Term
(see "Purchase of Fund Shares"). In the case of exchanges of Class A shares
which are subject to a CDSC, the holding period also includes the time
(calculated as described above) the shareholder was invested in shares of a FSC
Fund. In the case of shares exchanged into an Exchange Fund on or after April
23, 1990, upon a redemption of shares which results in a CDSC being imposed, a
credit (not to exceed the amount of the CDSC) will be given in an amount equal
to the Exchange Fund 12b-1 distribution fees incurred on or after that date
which are attributable to those shares. (Exchange Fund 12b-1 distribution fees
are described in the prospectuses for those funds.) Class B shares of the Fund
acquired in exchange for shares of Global Short-Term or Class B shares of
another Morgan Stanley Dean Witter Multi-Class Fund having a different CDSC
schedule than that of this Fund will be subject to the higher CDSC schedule,
even if such shares are subsequently re-exchanged for shares of the fund with
the lower CDSC schedule.
Additional Information Regarding Exchanges. Purchases and exchanges
should be made for investment purposes only. A pattern of frequent exchanges
may be deemed by the Investment Manager to be abusive and contrary to the best
interests of the Fund's other shareholders and, at the Investment Manager's
discretion, may be limited by the Fund's refusal to accept additional purchases
and/or exchanges from the investor. Although the Fund does not have any
specific definition of what constitutes a pattern of frequent exchanges, and
will consider all relevant factors in determining whether a particular
situation is abusive and contrary to the best interests of the Fund and its
other shareholders, investors should be aware that the Fund and each of the
other Morgan Stanley Dean Witter Funds may in their discretion limit or
otherwise restrict the number of times this Exchange Privilege may be exercised
by any investor. Any such restriction will be made by the Fund on a prospective
basis only, upon notice to the shareholder not later than ten days following
such shareholder's most recent exchange. Also, the Exchange Privilege may be
terminated or revised at any time by the Fund and/or any of such Morgan Stanley
Dean Witter Funds for which shares of the Fund have been exchanged, upon such
notice as may be required by applicable regulatory agencies. Shareholders
maintaining margin accounts with DWR or another Selected Dealer are referred to
their Morgan Stanley Dean Witter Financial Advisor or other Selected
Broker-Dealer representative regarding restrictions on exchange of shares of
the Fund pledged in the margin account.
The current prospectus for each fund describes its investment
objective(s) and policies, and shareholders should obtain a copy and examine it
carefully before investing. Exchanges are subject to the minimum investment
requirement of each Class of shares and any other conditions imposed by each
fund. In the case of a shareholder holding a share certificate or certificates,
no exchanges may be made until all applicable share certificates have been
received by the Transfer Agent and deposited in the shareholder's account. An
exchange will be treated for federal income tax purposes the same as a
repurchase or redemption of shares, on which the shareholder may realize a
capital gain or loss. However, the ability to deduct capital losses on an
exchange may be limited in situations where there is an exchange of shares
within ninety days after the shares are purchased. The Exchange Privilege is
only available in states where an exchange may legally be made.
If DWR or another Selected Broker-Dealer is the current dealer of record
and its account numbers are part of the account information, shareholders may
initiate an exchange of shares of the Fund for shares of any of the Morgan
Stanley Dean Witter Funds (for which the Exchange Privilege is available)
pursuant to this Exchange Privilege by contacting their Morgan Stanley Dean
Witter Financial Advisor or other Selected Broker-Dealer representative (no
Exchange Privilege Authorization Form is required). Other shareholders (and
those shareholders who are clients of DWR or another Selected Broker-Dealer but
who wish to make exchanges
31
<PAGE>
directly by telephoning the Transfer Agent) must complete and forward to the
Transfer Agent an Exchange Privilege Authorization Form, copies of which may be
obtained from the Transfer Agent, to initiate an exchange. If the Authorization
Form is used, exchanges may be made in writing or by contacting the Transfer
Agent at (800) 869-NEWS (toll-free).
The Fund will employ reasonable procedures to confirm that exchange
instructions communicated over the telephone are genuine. Such procedures may
include requiring various forms of personal identification such as name,
mailing address, social security or other tax identification number and DWR or
other Selected Broker-Dealer account number (if any). Telephone instructions
may also be recorded. If such procedures are not employed, the Fund may be
liable for any losses due to unauthorized or fraudulent instructions.
Telephone exchange instructions will be accepted if received by the
Transfer Agent between 9:00 a.m. and 4:00 p.m. New York time, on any day the
New York Stock Exchange is open. Any shareholder wishing to make an exchange
who has previously filed an Exchange Privilege Authorization Form and who is
unable to reach the Fund by telephone should contact his or her Morgan Stanley
Dean Witter Financial Advisor or other Selected Broker-Dealer representative,
if appropriate, or make a written exchange request. Shareholders are advised
that during periods of drastic economic or market changes, it is possible that
the telephone exchange procedures may be difficult to implement, although this
has not been the case with the Morgan Stanley Dean Witter Funds in the past.
For further information regarding the Exchange Privilege, shareholders
should contact their Morgan Stanley Dean Witter Financial Advisor or other
Selected Broker-Dealer representative or the Transfer Agent.
REDEMPTIONS AND REPURCHASES
- --------------------------------------------------------------------------------
Redemption. Shares of each Class of the Fund can be redeemed for cash at
any time at the net asset value per share next determined less the amount of
any applicable CDSC in the case of
Class A, Class B or Class C shares (see "Purchase of Fund Shares"). If shares
are held in a shareholder's account without a share certificate, a written
request for redemption sent to the Fund's Transfer Agent at P.O. Box 983,
Jersey City, NJ 07303 is required. If certificates are held by the shareholder,
the shares may be redeemed by surrendering the certificates with a written
request for redemption, along with any additional documentation required by the
Transfer Agent.
Repurchase. DWR and other Selected Broker- Dealers are authorized to
repurchase shares represented by a share certificate which is delivered to any
of their offices. Shares held in a shareholder's account without a share
certificate may also be repurchased by DWR and other Selected Broker-Dealers
upon the telephonic request of the shareholder. The repurchase price is the net
asset value per share next determined (see "Purchase of Fund Shares") after
such purchase order is received by DWR or other Selected Broker-Dealer, reduced
by any applicable CDSC.
The CDSC, if any, will be the only fee imposed upon repurchase by the
Fund or the Distributor. The offer by DWR and other Selected Broker-Dealers to
repurchase shares may be suspended without notice by them at any time. In that
event, shareholders may redeem their shares through the Fund's Transfer Agent
as set forth above under "Redemption."
Payment for Shares Redeemed or Repurchased. Payment for shares presented
for repurchase or redemption will be made by check within seven days after
receipt by the Transfer Agent of the certificate and/or written request in good
order. Such payment may be postponed or the right of redemption suspended under
unusual circumstances. If the
32
<PAGE>
shares to be redeemed have recently been purchased by check, payment of the
redemption proceeds may be delayed for the minimum time needed to verify that
the check used for investment has been honored (not more than fifteen days from
the time of receipt of the check by the Transfer Agent.) Shareholders
maintaining margin accounts with DWR or another Selected Dealer are referred to
their Morgan Stanley Dean Witter Financial Advisor or other Selected
Broker-Dealer representative regarding restrictions on redemption of shares of
the Fund pledged in the margin account.
Reinstatement Privilege. A shareholder who has had his or her shares
redeemed or repurchased and has not previously exercised this reinstatement
privilege may, within 35 days after the date of the redemption or repurchase,
reinstate any portion or all of the proceeds of such redemption or repurchase
in shares of the Fund in the same Class from which such shares were redeemed or
repurchased, at their net asset value next determined after a reinstatement
request, together with the proceeds, is received by the Transfer Agent and
receive a pro rata credit for any CDSC paid in connection with such redemption
or repurchase.
Involuntary Redemption. The Fund reserves the right, on sixty days'
notice, to redeem, at net asset value, the shares of any shareholder (other
than shares held in an Individual Retirement Account or Custodial Account under
Section 403(b)(7) of the Internal Revenue Code) whose shares due to redemptions
by the shareholder have a value of less than $100, or such lesser amount as may
be fixed by the Board of Trustees or, in the case of an account opened through
EasyInvestSM, if after twelve months the shareholder has invested less than
$1,000 in the account. However, before the Fund redeems such shares and sends
the proceeds to the shareholder, it will notify the shareholder that the value
of the shares is less than the applicable amount and allow him or her sixty
days to make an additional investment in an amount which will increase the
value of his or her account to at least the applicable amount before the
redemption is processed. No CDSC will be imposed on any involuntary redemption.
DIVIDENDS, DISTRIBUTIONS AND TAXES
- --------------------------------------------------------------------------------
Dividends and Distributions. The Fund declares dividends separately for
each Class of shares and intends to pay semi-annual dividends and to distribute
substantially all of the Fund's net investment income and net short-term and
long-term capital gains, if there are any. The Fund intends to distribute
dividends from net long-term capital gains, if any, at least once each year.
The Fund may, however, determine to retain all or part of any long-term capital
gains in any year for reinvestment.
All dividends and any capital gains distributions will be paid in
additional shares of the same Class and automatically credited to the
shareholder's account without issuance of a share certificate unless the
shareholder requests in writing that all dividends be paid in cash. Shares
acquired by dividend and distribution reinvestments will not be subject to any
front-end sales charge or CDSC. Class B shares acquired through dividend and
distribution reinvestments will become eligible for conversion to Class A
shares on a pro rata basis. Distributions paid on Class A and Class D shares
will be higher than for Class B and Class C shares because distribution fees
paid by Class B and Class C shares are higher. (See "Shareholder
Services--Automatic Investment of Dividends and Distributions.")
Taxes. Because the Fund intends to distribute all of its net investment
income and net short-term capital gains to shareholders and otherwise remain
qualified as a regulated investment company under Subchapter M of the Internal
Revenue Code, it is not expected that the Fund will be required to pay any
federal income tax. Shareholders who are required to pay taxes on their income
will normally have to pay federal income taxes, and any state income taxes, on
the dividends and distributions they re-
33
<PAGE>
ceive 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 dividend income regardless of whether the
shareholder receives such distributions in additional shares or in cash. Any
dividends declared in the last quarter of any calendar year which are paid in
the following year prior to February 1 will be deemed, for tax purposes, to
have been received by the shareholder in the prior year.
Distributions of net long-term capital gains, if any, are taxable to
shareholders as long-term capital gains regardless of how long a shareholder
has held the Fund's shares and regardless of whether the distribution is
received in additional shares or in cash. Capital gains distributions are not
eligible for the dividends received deduction.
The Fund may at times make payments from sources other than income or
net capital gains. Payments from such sources would, in effect, represent a
return of a portion of each shareholder's investment. All, or a portion, of
such payments will not be taxable to shareholders.
After the end of the year, shareholders will be sent full information on
their dividends and capital gains distributions for tax purposes. Shareholders
will also be notified of their proportionate share of long-term capital gains
distributions that are eligible for a reduced rate of tax under the Taxpayer
Relief Act of 1997. To avoid being subject to a 31% federal backup withholding
tax on taxable dividends, capital gains distributions and the proceeds of
redemptions and repurchases, shareholders' taxpayer identification numbers must
be furnished and certified as to their accuracy.
Shareholders should consult their tax advisors as to the applicability
of the foregoing to their current situation.
PERFORMANCE INFORMATION
- --------------------------------------------------------------------------------
From time to time the Fund may quote its "total return" in
advertisements and sales literature. These figures are computed separately for
Class A, Class B, Class C and Class D shares. The total return of the Fund is
based on historical earnings and is not intended to indicate future
performance. The "average annual total return" of the Fund refers to a figure
reflecting the average annualized percentage increase (or decrease) in the
value of an initial investment in a Class of the Fund of $1,000 over periods of
one, five and ten years. Average annual total return reflects all income earned
by the Fund, any appreciation or depreciation of the Fund's assets, all
expenses incurred by the applicable Class and all sales charges which will be
incurred by shareholders, for the stated periods. It also assumes reinvestment
of all dividends and distributions paid by the Fund.
In addition to the foregoing, the Fund may advertise its total return
for each Class over different periods of time by means of aggregate, average,
year-by-year or other types of total return figures. Such calculations may or
may not reflect the deduction of any sales charge which, if reflected, would
reduce the performance quoted. The Fund may also advertise the growth of
hypothetical investments of $10,000, $50,000 and $100,000 in each Class of
shares of the Fund. The Fund from time to time may also advertise its
performance relative to certain performance rankings and indexes compiled by
independent organizations (such as mutual fund performance rankings of Lipper
Analytical Services, Inc., the S&P 500 Stock Index and the Dow Jones Industrial
Average).
34
<PAGE>
ADDITIONAL INFORMATION
- --------------------------------------------------------------------------------
Voting Rights. All shares of beneficial interest of the Fund are of
$0.01 par value and are equal as to earnings, assets and voting privileges
except that each Class will have exclusive voting privileges with respect to
matters relating to distribution expenses borne solely by such Class or any
other matter in which the interests of one Class differ from the interests of
any other Class. In addition, Class B shareholders will have the right to vote
on any proposed material increase in Class A's expenses, if such proposal is
submitted separately to Class A shareholders. Also, as discussed herein, Class
A, Class B and Class C bear the expenses related to the distribution of their
respective shares.
The Fund is not required to hold Annual Meetings of Shareholders and in
ordinary circumstances the Fund does not intend to hold such meetings. The
Trustees may call Special Meetings of Shareholders for action by shareholder
vote as may be required by the Act or the Declaration of Trust. Under certain
circumstances, the Trustees may be removed by action of the Trustees or by the
Shareholders.
Under Massachusetts law, shareholders of a business trust may, under
certain 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.
Code of Ethics. Directors, officers and employees of MSDW Advisors, MSDW
Services and MSDW Distributors are subject to a strict Code of Ethics adopted
by those companies. The Code of Ethics is intended to ensure that the interests
of shareholders and other clients are placed ahead of any personal interest,
that no undue personal benefit is obtained from a person's employment
activities and that actual and potential conflicts of interest are avoided. To
achieve these goals and comply with regulatory requirements, the Code of Ethics
requires, among other things, that personal securities transactions by
employees of the companies be subject to an advance clearance process to
monitor that no Morgan Stanley Dean Witter Fund is engaged at the same time in
a purchase or sale of the same security. The Code of Ethics bans the purchase
of securities in an initial public offering, and also prohibits engaging in
futures and options transactions and profiting on short-term trading (that is,
a purchase within sixty days of a sale or a sale within sixty days of a
purchase) of a security. In addition, investment personnel may not purchase or
sell a security for their personal account within thirty days before or after
any transaction in any Morgan Stanley Dean Witter Fund managed by them. Any
violations of the Code of Ethics are subject to sanctions, including reprimand,
demotion or suspension or termination of employment. The Code of Ethics
comports with regulatory requirements and the recommendations in the 1994
report by the Investment Company Institute Advisory Group on Personal
Investing.
Master/Feeder Conversion. The Fund reserves the right to seek to achieve
its investment objective by investing all of its investable assets in a
diversified, open-end management investment company having the same investment
objective and policies and substantially the same investment restrictions as
those applicable to the Fund.
Shareholder Inquiries. All inquiries regarding the Fund should be
directed to the Fund at the telephone numbers or address set forth on the front
cover of this Prospectus.
35
<PAGE>
Morgan Stanley Dean Witter MORGAN STANLEY
American Value Fund DEAN WITTER
Two World Trade Center AMERICAN
New York, New York 10048 VALUE FUND
TRUSTEES
Michael Bozic
Charles A. Fiumefreddo
Edwin J. Garn
John R. Haire
Wayne E. Hedien
Dr. Manuel H. Johnson
Michael E. Nugent
Philip J. Purcell
John L. Schroeder
OFFICERS
Charles A. Fiumefreddo
Chairman and Chief Executive Officer
Barry Fink
Vice President, Secretary and
General Counsel
Anita H. Kolleeny
Vice President
Thomas F. Caloia
Treasurer
CUSTODIAN
The Bank of New York
90 Washington Street
New York, New York 10286
TRANSFER AGENT AND
DIVIDEND DISBURSING AGENT
Morgan Stanley Dean Witter Trust FSB
Harborside Financial Center
Plaza Two
Jersey City, New Jersey 07311
INDEPENDENT ACCOUNTANTS
PricewaterhouseCoopers LLP
1177 Avenue of the Americas
New York, New York 10036
PROSPECTUS--MAY 1, 1998,
INVESTMENT MANAGER AS REVISED AUGUST 21, 1998
Morgan Stanley Dean Witter Advisors Inc.
<PAGE>
DEAN WITTER AMERICAN VALUE FUND
Two World Trade Center, New York, New York 10048
LETTER TO THE SHAREHOLDERS December 31, 1997
DEAR SHAREHOLDER:
The past year proved to be eventful for investors. During the first half of
1997 the market was led exclusively by blue-chip companies -- only index
funds and blue chip equity funds performed well. Market leadership was very
narrow at this time, with the 25 largest stocks on the S&P 500 contributing
to an inordinate share of the index's 20 percent gain. During that period,
Dean Witter American Value Fund was up only 12 percent.
In mid summer, the U.S. dollar broke out of 6 and 10-year trading ranges.
This change led to a rotation of the Fund, out of industries with substantial
foreign exposure and into domestically oriented ones. This process was
initiated by reducing the portfolio's weightings in such sectors as
technology, aerospace, agriculture, energy service, and global consumer
stocks, and increasing its exposure to such domestic industries as retail and
financial services.
Additionally, the Fund significantly increased its weighting in
mid-capitalization stocks. This was done because mid-cap stocks generally
have minimal exposure to foreign currencies and economies, the capital gains
tax rate favors this sector and because the Fund's portfolio manager
anticipates attractive relative earnings for mid-caps in a still robust
domestic economy. By July, the Fund's mid-cap weighting totaled 40 percent of
net assets. As a result, the Fund's year-to-date performance nearly doubled
between June and July, from 12.24 percent for the six months ended June 30,
1997, to 25.29 percent for the seven months ended July 30, 1997.
By September it had become clear that the U.S. dollar's sharp appreciation
carried greater repercussions than had been expected initially. For example,
many emerging-market countries had pegged their currencies to the dollar. As
a result, many Asian and Latin American countries suddenly found their
exports to be uncompetitive. For many of these countries, exports are the
main engine of economic growth. In response to these developments, currency
devaluations began to occur in Southeast Asia and quickly spread to other
emerging markets. This turbulence induced the
<PAGE>
DEAN WITTER AMERICAN VALUE FUND
LETTER TO THE SHAREHOLDERS December 31, 1997, continued
Fund to exit industries with Asian exposure. Additionally, evidence began to
mount that U.S. corporate earnings could come under pressure as wage costs
accelerate and pricing flexibility decline in the face of inexpensive Asian
imports. As a result, the Fund further shifted to domestically oriented
industries characterized by steady-growth and high earnings visibility.
[THE NARRATIVE AND/OR TABULAR INFORMATION BELOW IS A FAIR AND ACCURATE
DESCRIPTION OF GRAPHIC OR IMAGE MATERIAL OMITTED FOR THE
PURPOSE OF EDGAR FILING.]
GROWTH OF $10,000 -- CLASS B
($ IN THOUSANDS)
Lipper
Date Total S&P 500 IX(4) Growth Funds IX(5)
- ------------------------------------------------------------------------------
December 31, 1987 $10,000 $10,000 $10,000
December 31, 1988 $11,084 $11,655 $11,413
December 31, 1989 $13,899 $15,343 $14,548
December 31, 1990 $13,774 $14,869 $13,761
December 31, 1991 $21,522 $19,390 $18,761
December 31, 1992 $22,348 $20,886 $20,192
December 31, 1993 $26,528 $22,965 $22,611
December 31, 1994 $24,738 $23,268 $22,256
December 31, 1995 $35,178 $32,003 $29,522
December 31, 1996 $38,883 $39,347 $34,683
December 31, 1997 $51,149(3) $52,469 $44,422
Average Annual Total Returns
1 year 5 Years 10 Years
- --------------------------------------
31.55(1) 18.01(1) 17.73(1)
26.55(2) 17.80(2) 17.73(2)
PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE RETURNS
1.) Figure shown assumes reinvestment of all distributions and does not
reflect the deduction of any sales charges.
2.) Figure shown assumes reinvestment of all distributions and the deduction
of the maximum applicable contingent deferred sales charge (CDSC)
(1 year-5%, 5 years-2%, 10 years-0%). See the Fund's current prospectus
for complete details on fees and sales charges.
3.) Closing value assuming a complete redemption on December 31, 1997.
4.) The Standard & Poor's 500 Composite Stock Price Index (S&P 500) is a
broad-based index, the performance of which is based on the average
performance of 500 widely held common stocks. The performance of the Index
does not include any expenses, fees or charges. The Index is unmanaged and
should not be considered an investment.
5.) The Lipper Growth Funds Index is an equally-weighted performance index of
the largest qualifying funds (based on net assets) in the Lipper Growth
Funds objective. The Index, which is adjusted for capital gains
distributions and income dividends, is unmanaged and should not be
considered an investment. There are currently 30 funds represented in
this Index.
PERFORMANCE
For the fiscal year ended December 31, 1997, the Fund's Class B shares
produced a total return of 31.55 percent compared to 33.35 percent for the
Standard & Poor's 500 Composite Stock Price Index (S&P 500) and 28.08 percent
for the Lipper Growth Funds Index. The accompanying chart illustrates the
performance of a $10,000 investment in the Fund for the 10-year period ended
December 31, 1997, versus the performance of similar hypothetical investments
in the S&P 500 and the Lipper Growth Funds Index.
THE PORTFOLIO
Based on recent analysis, the Fund's portfolio manager expects U.S. economic
growth to slow to the 2.25 percent range in 1998, with earnings in the
vicinity of 5 percent. When earnings growth slips below 10 percent, market
leadership typically shifts from economically sensitive issues to steady
growth ones. In response, the Fund has been tilted in this direction so that
steady growth stocks currently represent 60 percent of net assets.
On the cyclical side, the Fund's 12 percent weighting in technology
emphasizes software and services, which are more stable than other technology
sectors during economic slowdowns. Holdings in this area include Computer
Associates International, Inc. and BMC Software, Inc. As of December 31,
1997, the Fund had a 7 percent weighting in retail, which is expected to be
bolstered by a low
<PAGE>
DEAN WITTER AMERICAN VALUE FUND
LETTER TO THE SHAREHOLDERS December 31, 1997, continued
unemployment level below 5 percent and by real wage growth and lower sourcing
costs. Retail positions include Wal-Mart, Inc., Dayton Hudson Corp. and
Barnes & Noble, Inc.
On the growth side, the Fund has increased its consumer staples weighting to
11 percent of net assets, emphasizing industries and companies with little or
no South American or Asian exposure. This sector includes food chains such as
Safeway Inc., drugstores like Rite Aid Corp., and such selected food
companies as Nabisco Holdings Corp. In the consumer/business services area,
the Fund continues to hold 12 percent of its net assets in the radio/cable
and newspaper industries. Commitments in these sectors include Clear Channel
Communications Inc., CBS Corp., Comcast Corp. and Gannett Co., Inc.
Health care, which remains overweighted in the Fund at 14 percent, reflects
an emphasis on drugs, biotechnology and medical devices -- all industries
with patent protection and pricing power. Companies in these areas include
Eli Lilly & Co., Pfizer, Inc., Centocor Inc. and Guidant Corp. The Fund has
also maintained an overweighted position in interest-rate sensitive stocks,
as evidenced by its 25 percent commitment to the financial sector, where the
focus is on regional banks, brokerage, government agencies and utilities. A
sample of some of these holdings includes Summit Bancorp, Norwest Corp.,
Travelers Group, Inc., Fannie Mae and Bell Atlantic Corp.
Because an economic backdrop that is typically associated with falling
interest rates and more difficult corporate earnings is expected to remain in
place, we have established a 6 percent position in long-term U.S. Treasuries
and a 3 percent weighting in 30-year zero-coupon bonds.
OUTLOOK
To sum up, 1997 saw the Fund shift away from industries tilted toward foreign
markets and cyclical growth, and began to focus on steady, reliable, domestic
growth. These related rotations served the Fund well in 1997. This new focus
will likely remain in place throughout much of 1998.
We appreciate your support of the Dean Witter American Value Fund and look
forward to continuing to serve your investment needs and objectives.
Very truly yours,
/s/ Charles A. Fiumefreddo
CHARLES A. FIUMEFREDDO
Chairman of the Board
<PAGE>
DEAN WITTER AMERICAN VALUE FUND
PORTFOLIO OF INVESTMENTS December 31, 1997
<TABLE>
<CAPTION>
NUMBER OF
SHARES VALUE
- ---------------------------------------------------------------------------------------------
<S> <C> <C>
COMMON STOCKS (86.0%)
Agriculture Related (1.3%)
400,000 Dekalb Genetics Corp. (Class B) ................................. $ 15,700,000
516,667 Delta & Pine Land Co. .......................................... 15,758,343
200,000 Pioneer Hi-Bred International, Inc. ............................ 21,450,000
--------------
52,908,343
--------------
Auto Related (0.1%)
127,900 Budget Group, Inc. (Class A)* ................................... 4,420,544
--------------
Banks (9.8%)
350,000 Ahmanson (H.F.) & Co. .......................................... 23,428,125
105,000 AmSouth Bancorporation .......................................... 5,702,812
75,000 City National Corp. ............................................ 2,770,312
130,000 Comerica, Inc. ................................................. 11,732,500
17,450,000 Credito Italiano SpA (Italy) .................................... 53,823,613
275,000 Crestar Financial Corp. ........................................ 15,675,000
687,000 Dime Bancorp, Inc. ............................................. 20,781,750
205,000 First Security Corp. ........................................... 8,584,375
150,000 First Tennessee National Corp. ................................. 10,012,500
205,000 First Union Corp. .............................................. 10,506,250
340,000 Mellon Bank Corp. .............................................. 20,612,500
200,000 Northern Trust Corp. ........................................... 13,950,000
1,200,000 Norwest Corp. .................................................. 46,350,000
360,000 PNC Bank Corp. ................................................. 20,542,500
185,000 Southtrust Corp. ............................................... 11,701,250
200,000 Summit Bancorp .................................................. 10,650,000
245,000 U.S. Bancorp .................................................... 27,424,687
100,000 Union Planters Corp. ............................................ 6,793,750
410,000 Washington Mutual, Inc. ........................................ 26,137,500
170,000 Wells Fargo & Co. .............................................. 57,704,375
93,200 Zions Bancorporation ............................................ 4,194,000
--------------
409,077,799
--------------
Beverages - Soft Drinks (0.1%)
41,900 Coca Cola Co. ................................................... 2,791,587
--------------
Biotechnology (2.2%)
350,000 Alkermes, Inc.* ................................................. 6,868,750
870,000 Biochem Pharma, Inc. (Canada)* .................................. 18,106,875
881,000 Centocor, Inc.* ................................................. 29,293,250
300,000 Genzyme Corp. General Division* ................................ 8,287,500
375,000 Gilead Sciences, Inc.* .......................................... 14,343,750
385,000 IDEC Pharmaceuticals Corp.* ..................................... 13,234,375
--------------
90,134,500
--------------
Cable & Telecommunications (2.2%)
324,000 Comcast Corp. (Class A) ......................................... $ 10,287,000
1,090,000 Comcast Corp. (Class A Special) ................................. 34,335,000
550,000 Cox Communications, Inc. (Class A)* ............................. 22,034,375
900,000 Tele-Communications, Inc. (Class A)* ............................ 25,087,500
--------------
91,743,875
--------------
Cable Television Equipment (0.4%)
300,000 CIENA Corp.* .................................................... 18,337,500
--------------
Capital Goods (0.6%)
325,000 General Electric Co. ............................................ 23,846,875
--------------
Communications Equipment (0.2%)
180,000 Cisco Systems, Inc.* ............................................ 10,035,000
--------------
Computer Services (0.5%)
400,000 Paychex, Inc. ................................................... 20,250,000
--------------
Computer Software (4.5%)
320,000 BMC Software, Inc.* ............................................. 20,960,000
69,000 Citrix Systems, Inc.* ........................................... 5,244,000
800,000 Computer Associates International, Inc. ........................ 42,300,000
730,000 Compuware Corp.* ................................................ 23,360,000
117,500 Manugistics Group, Inc.* ........................................ 5,214,062
1,000,000 PeopleSoft, Inc.* ............................................... 38,750,000
510,000 Platinum Technology, Inc.* ...................................... 14,407,500
40,000 SAP AG (Pref.)(Germany) ......................................... 13,092,325
440,500 Veritas Software Corp.* ......................................... 22,300,312
--------------
185,628,199
--------------
Consumer Business Services (2.2%)
700,000 Automatic Data Processing, Inc. ................................. 42,962,500
500,000 Corrections Corp. of America* ................................... 18,531,250
635,000 Sysco Corp. ..................................................... 28,932,187
--------------
90,425,937
--------------
<PAGE>
Consumer - Products (10.5%)
385,000 Alberto-Culver Co. (Class B) .................................... 12,344,062
875,000 Albertson's, Inc. ............................................... 41,453,125
400,000 Clorox Co. ...................................................... 31,625,000
600,000 CVS Corp. ....................................................... 38,437,500
1,020,000 Fred Meyer, Inc.* ............................................... 37,102,500
500,000 Heinz (H.J.) Co. ................................................ 25,406,250
1,000,000 Kroger Co.* ..................................................... 36,937,500
920,000 Nabisco Holdings Corp. (Class A) ................................ 44,562,500
SEE NOTES TO FINANCIAL STATEMENTS
<PAGE>
DEAN WITTER AMERICAN VALUE FUND
PORTFOLIO OF INVESTMENTS December 31, 1997, continued
NUMBER OF
SHARES VALUE
- ---------------------------------------------------------------------------------------------
100,000 Procter & Gamble Co. ........................................... $ 7,981,250
475,000 Quaker Oats Company (The) ....................................... 25,056,250
700,000 Rite Aid Corp. ................................................. 41,081,250
699,000 Safeway, Inc.* .................................................. 44,211,750
200,000 Sara Lee Corp. .................................................. 11,262,500
1,300,000 Walgreen Co. .................................................... 40,787,500
--------------
438,248,937
--------------
Drugs (6.1%)
425,000 Bristol-Myers Squibb Co. ....................................... 40,215,625
240,000 Cardinal Health, Inc. .......................................... 18,030,000
215,000 Dura Pharmaceuticals, Inc.* ..................................... 9,863,125
620,000 Lilly (Eli) & Co. .............................................. 43,167,500
200,000 Medicis Pharmaceutical Corp. (Class A)* ......................... 10,250,000
12,000 Novartis AG (Switzerland) ....................................... 19,459,459
530,000 Pfizer, Inc. .................................................... 39,518,125
645,000 Schering-Plough Corp. .......................................... 40,070,625
271,000 Warner-Lambert Co. ............................................. 33,604,000
--------------
254,178,459
--------------
Finance (1.1%)
800,000 Fannie Mae ...................................................... 45,650,000
--------------
Financial - Miscellaneous (6.0%)
205,000 American Express Co. ........................................... 18,296,250
190,000 Associates First Capital Corp. (Class A) ........................ 13,513,750
300,000 Donaldson, Lufkin & Jenrette, Inc. .............................. 23,850,000
504,050 Edwards (A.G.), Inc. ........................................... 20,035,987
965,000 Freddie Mac ..................................................... 40,469,687
700,000 Hambrecht & Quist Group* ........................................ 25,550,000
2,800 Legg Mason, Inc. ............................................... 156,625
400,000 Lehman Brothers Holdings, Inc. .................................. 20,400,000
650,000 Merrill Lynch & Co., Inc. ...................................... 47,409,375
605,500 Paine Webber Group, Inc. ........................................ 20,927,594
91,500 Price (T. Rowe) Associates, Inc. ............................... 5,753,063
274,600 Providian Financial Corp. ....................................... 12,408,488
--------------
248,770,819
--------------
Healthcare - Diversified (0.4%)
470,000 General Nutrition Companies, Inc.* ............................. 15,921,250
--------------
Healthcare Products & Services (3.7%)
1,000,000 HBO & Co. ...................................................... 47,937,500
1,650,000 Health Management Associates, Inc. (Class A)* ................... 41,662,500
1,200,000 Healthsouth Corp.* .............................................. $ 33,300,000
398,100 Renal Treatment Centers, Inc.* .................................. 14,381,363
583,333 Total Renal Care Holdings, Inc.* ................................ 16,041,658
--------------
153,323,021
--------------
Hotels/Motels (1.1%)
1,393,798 Cendant Corp.* .................................................. 47,911,806
--------------
Household Products (0.4%)
360,000 Sunbeam Corporation, Inc. ...................................... 15,165,000
--------------
Insurance (3.7%)
441,000 Allstate Corp. .................................................. 40,075,875
120,000 Hartford Financial Services Group Inc. .......................... 11,227,500
250,000 Lincoln National Corp. .......................................... 19,531,250
133,470 Marsh & McLennan Companies, Inc. ................................ 9,951,857
401,000 SunAmerica Inc. ................................................. 17,142,750
125,000 Torchmark Corp. ................................................ 5,257,813
950,000 Travelers Group, Inc. ........................................... 51,181,250
--------------
154,368,295
--------------
Internet (2.3%)
600,000 America Online, Inc.* ........................................... 53,512,500
300,000 Check Point Software Technologies Ltd. (Israel)* ................ 12,225,000
260,000 CheckFree Holdings Corp.* ....................................... 7,020,000
345,000 Yahoo! Inc.* .................................................... 23,891,250
--------------
96,648,750
--------------
Machinery - Diversified (0.2%)
164,800 Thermo Electron Corp.* ......................................... 7,333,600
--------------
Media Group (9.3%)
1,610,000 CBS Corp. ....................................................... 47,394,375
689,500 Chancellor Media Corp.* ......................................... 51,453,938
450,000 Clear Channel Communications, Inc.* ............................. 35,746,875
701,000 Gannett Co., Inc. ............................................... 43,330,563
300,000 HSN, Inc.* ...................................................... 15,450,000
438,000 Jacor Communications, Inc.* ..................................... 23,268,750
400,000 News Corp., Ltd. (ADR)(Australia) ............................... 8,925,000
650,000 Outdoor Systems, Inc.* .......................................... 24,943,750
760,000 Time Warner, Inc. ............................................... 47,120,000
483,100 Tribune Co. .................................................... 30,072,975
325,000 Universal Outdoor Holdings, Inc.* .............................. 16,900,000
SEE NOTES TO FINANCIAL STATEMENTS
<PAGE>
DEAN WITTER AMERICAN VALUE FUND
PORTFOLIO OF INVESTMENTS December 31, 1997, continued
NUMBER OF
SHARES VALUE
- ---------------------------------------------------------------------------------------------
306,600 Univision Communications, Inc. (Class A)* .......................$ 21,404,513
500,000 Viacom, Inc. (Class B)* ......................................... 20,718,750
--------------
386,729,489
--------------
Medical Supplies (1.9%)
450,000 Guidant Corp. ................................................... 28,012,500
500,000 Medtronic, Inc. ................................................. 26,156,250
200,000 Mentor Corp. .................................................... 7,300,000
285,300 Sofamor Danek Group, Inc.* ...................................... 18,562,331
--------------
80,031,081
--------------
Miscellaneous (0.7%)
480,000 Equitable Companies, Inc. ....................................... 23,880,000
169,000 Excite, Inc.* ................................................... 5,070,000
--------------
28,950,000
--------------
Recreation (0.5%)
205,000 Walt Disney Co. ................................................. 20,307,813
--------------
Restaurants (0.3%)
385,000 Cracker Barrel Old Country Store, Inc. .......................... 12,849,375
--------------
Retail (7.0%)
401,000 Barnes & Noble, Inc.* ........................................... 13,383,375
1,500,000 Costco Companies, Inc.* ......................................... 66,843,750
646,000 Dayton-Hudson Corp. ............................................. 43,605,000
527,500 Dollar General Corp. ............................................ 19,121,875
295,000 Family Dollar Stores, Inc. ...................................... 8,647,188
600,000 Gap, Inc. ....................................................... 21,262,500
700,000 Home Depot, Inc. ............................................... 41,212,500
361,100 Lowe's Companies, Inc. ......................................... 17,219,956
543,000 Mattel, Inc. ................................................... 20,226,750
350,000 Proffitt's, Inc.* ............................................... 9,953,125
740,000 Wal-Mart Stores, Inc. ........................................... 29,183,750
--------------
290,659,769
--------------
Telecommunications (1.6%)
750,000 LCI International, Inc.* ........................................ 23,062,500
800,000 Teleport Communications Group Inc.* ............................. 43,900,000
--------------
66,962,500
--------------
Transportation (0.9%)
500,000 OMI Corp.* ...................................................... 4,593,750
557,000 US Airways Group Inc.* .......................................... 34,812,500
--------------
39,406,250
--------------
Utilities (3.9%)
400,000 Ameritech Corp. .................................................$ 32,200,000
386,000 Bell Atlantic Corp. ............................................ 35,126,000
550,000 Consolidated Edison Co. of New York, Inc. ....................... 22,550,000
400,000 FPL Group, Inc. ................................................ 23,675,000
400,000 GTE Corp. ....................................................... 20,900,000
150,000 New York State Electric & Gas Corp. ............................ 5,325,000
455,000 U.S. West Communications Group, Inc. ............................ 20,531,875
--------------
160,307,875
--------------
Utilities - Electric (0.2%)
200,000 Pinnacle West Capital Corp. ..................................... 8,475,000
--------------
Utilities - Telecommunications (0.1%)
51,500 Intermedia Communications Inc.* ................................ 3,116,286
--------------
TOTAL COMMON STOCKS
(Identified Cost $3,070,263,608) ................................ 3,574,915,534
--------------
<PAGE>
<CAPTION>
PRINCIPAL
AMOUNT IN
THOUSANDS
- -----------
<S> <C> <C>
U.S. GOVERNMENT OBLIGATIONS (9.0%)
$242,000 U.S. Treasury Bond 6.375% due 08/15/27 .......................... 255,317,260
342,000 U.S. Treasury Strip 0.00% due 05/15/20 .......................... 88,916,580
107,000 U.S. Treasury Strip 0.00% due 11/15/19 .......................... 28,658,880
-------------
TOTAL U.S. GOVERNMENT OBLIGATIONS
(Identified Cost $356,519,055) .................................. 372,892,720
-------------
SHORT-TERM INVESTMENTS (7.1%)
U.S. GOVERNMENT AGENCY (a)(7.0%)
293,000 Federal Home Loan Mortgage Corp. 6.00% due 01/02/98
(Amortized Cost $292,951,167) 292,951,167
-------------
REPURCHASE AGREEMENT (0.1%)
The Bank of New York 3.875% due 01/02/98 (dated 12/31/97,
4,377 proceeds $4,377,721)(b) (Identified Cost $4,376,779) ............ 4,376,779
-------------
TOTAL SHORT-TERM INVESTMENTS
(Identified Cost $297,327,946) .................................. 297,327,946
-------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
<PAGE>
DEAN WITTER AMERICAN VALUE FUND
PORTFOLIO OF INVESTMENTS December 31, 1997, continued
<TABLE>
<CAPTION>
VALUE
- ------------------------------------ -------- --------------
<S> <C> <C>
TOTAL INVESTMENTS
(Identified Cost $3,724,110,609)(c) . 102.1% $4,245,136,200
LIABILITIES IN EXCESS OF OTHER
ASSETS .............................. (2.1) (89,244,700)
-------- --------------
NET ASSETS .......................... 100.0% $4,155,891,500
======== ==============
</TABLE>
- ------------
ADR American Depository Receipt.
* Non-income producing security.
(a) Security was purchased on a discount basis. The interest rate shown
has been adjusted to reflect a money market equivalent yield.
(b) Collateralized by $4,016,966 U.S. Treasury Note 7.00% due 07/15/06
valued at $4,464,314.
(c) The aggregate cost for federal income tax purposes approximates
identified cost. The aggregate gross unrealized appreciation is
$537,652,888 and the aggregate gross unrealized depreciation is
$16,627,297, resulting in net unrealized appreciation of
$521,025,591.
SEE NOTES TO FINANCIAL STATEMENTS
<PAGE>
DEAN WITTER AMERICAN VALUE FUND
FINANCIAL STATEMENTS
STATEMENT OF ASSETS AND LIABILITIES
December 31, 1997
<TABLE>
<CAPTION>
<S> <C>
ASSETS:
Investments in securities, at value
(identified cost $3,724,110,609)......................... $4,245,136,200
Receivable for:
Investments sold........................................ 29,647,388
Shares of beneficial interest sold...................... 8,751,357
Interest................................................ 5,827,705
Dividends............................................... 2,138,596
Prepaid expenses and other assets......................... 122,713
--------------
TOTAL ASSETS............................................ 4,291,623,959
--------------
LIABILITIES:
Payable for:
Investments purchased................................... 124,542,641
Distributions to shareholders .......................... 3,767,120
Plan of distribution fee................................ 2,946,023
Shares of beneficial interest repurchased............... 2,219,241
Investment management fee............................... 1,808,423
Accrued expenses and other payables....................... 449,011
--------------
TOTAL LIABILITIES....................................... 135,732,459
--------------
NET ASSETS ............................................. $4,155,891,500
==============
COMPOSITION OF NET ASSETS:
Paid-in-capital........................................... $3,481,928,047
Net unrealized appreciation .............................. 521,025,591
Accumulated net investment loss........................... (42,030)
Accumulated undistributed net realized gain............... 152,979,892
--------------
NET ASSETS ............................................. $4,155,891,500
==============
CLASS A SHARES:
Net Assets................................................ $15,843,639
Shares Outstanding (unlimited authorized, $.01 par value) 535,374
NET ASSET VALUE PER SHARE............................... $29.59
==============
MAXIMUM OFFERING PRICE PER SHARE,
(net asset value plus 5.54% of net asset value) ....... $31.23
==============
CLASS B SHARES:
Net Assets................................................ $4,078,071,882
Shares Outstanding (unlimited authorized, $.01 par value) 138,185,565
NET ASSET VALUE PER SHARE............................... $29.51
==============
CLASS C SHARES:
Net Assets................................................ $12,204,456
Shares Outstanding (unlimited authorized, $.01 par
value)................................................... 413,867
NET ASSET VALUE PER SHARE............................... $29.49
==============
CLASS D SHARES:
Net Assets................................................ $49,771,523
Shares Outstanding (unlimited authorized, $.01 par
value)................................................... 1,679,836
NET ASSET VALUE PER SHARE............................... $29.63
==============
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
<PAGE>
DEAN WITTER AMERICAN VALUE FUND
FINANCIAL STATEMENTS, continued
STATEMENT OF OPERATIONS
For the year ended December 31, 1997*
<TABLE>
<CAPTION>
<S> <C>
NET INVESTMENT INCOME:
INCOME
Dividends (net of $103,775 foreign
withholding tax)......................... $ 24,992,865
Interest.................................. 15,881,254
--------------
TOTAL INCOME............................ 40,874,119
--------------
EXPENSES
Plan of distribution fee (Class A
shares).................................. 7,380
Plan of distribution fee (Class B
shares).................................. 30,004,099
Plan of distribution fee (Class C
shares).................................. 26,712
Investment management fee................. 18,075,407
Transfer agent fees and expenses.......... 3,788,836
Registration fees......................... 359,919
Custodian fees............................ 228,926
Shareholder reports and notices........... 222,511
Professional fees......................... 61,757
Trustees' fees and expenses............... 15,729
Other..................................... 37,222
--------------
TOTAL EXPENSES.......................... 52,828,498
--------------
NET INVESTMENT LOSS..................... (11,954,379)
--------------
NET REALIZED AND UNREALIZED GAIN:
Net realized gain ........................ 738,335,473
Net change in unrealized appreciation .... 251,384,827
--------------
NET GAIN................................ 989,720,300
--------------
NET INCREASE.............................. $977,765,921
==============
</TABLE>
- ------------
* Class A, Class C and Class D shares were issued July 28, 1997.
SEE NOTES TO FINANCIAL STATEMENTS
<PAGE>
DEAN WITTER AMERICAN VALUE FUND
FINANCIAL STATEMENTS, continued
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
FOR THE YEAR FOR THE YEAR
ENDED ENDED
DECEMBER 31, 1997* DECEMBER 31, 1996
- ------------------------------------------------------ ------------------ -----------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
OPERATIONS:
Net investment loss.................................... $ (11,954,379) $ (9,041,376)
Net realized gain...................................... 738,335,473 275,397,900
Net change in unrealized appreciation.................. 251,384,827 13,163,448
------------------ -----------------
NET INCREASE......................................... 977,765,921 279,519,972
------------------ -----------------
DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income -Class B shares.................. -- (1,126,313)
Net realized gain
Class A shares........................................ (1,747,209) --
Class B shares........................................ (680,450,520) (299,891,577)
Class C shares........................................ (1,454,608) --
Class D shares........................................ (6,581,680) --
------------------ -----------------
TOTAL DIVIDENDS AND DISTRIBUTIONS.................... (690,234,017) (301,017,890)
------------------ -----------------
Net increase from transactions in shares of beneficial
interest.............................................. 769,509,113 731,461,022
------------------ -----------------
NET INCREASE......................................... 1,057,041,017 709,963,104
NET ASSETS:
Beginning of period.................................... 3,098,850,483 2,388,887,379
------------------ -----------------
END OF PERIOD
(Including net investment losses of $42,030 and
$43,257, respectively)................................ $4,155,891,500 $3,098,850,483
================== =================
</TABLE>
- ------------
* Class A, Class C and Class D shares were issued July 28, 1997.
SEE NOTES TO FINANCIAL STATEMENTS
<PAGE>
DEAN WITTER AMERICAN VALUE FUND
NOTES TO FINANCIAL STATEMENTS December 31, 1997
1. ORGANIZATION AND ACCOUNTING POLICIES
Dean Witter American Value 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
capital growth consistent with an effort to reduce volatility. The Fund seeks
to achieve its objective by investing in a diversified portfolio of
securities consisting principally of common stocks. The Fund was incorporated
in Maryland in 1979, commenced operations on March 27, 1980 and was
reorganized as a Massachusetts business trust on April 30, 1987. On July 28,
1997, the Fund commenced offering three additional classes of shares, with
the then current shares, other than shares which were purchased prior to
April 30, 1984 (and with respect to such shares, certain shares acquired
through reinvestment of dividends and capital gains distributions
(collectively the "Old Shares")), designated as Class B shares. The Old
Shares have been designated Class D shares.
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, 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 (in cases where a security is traded on more than one exchange, the
security is valued on the exchange designated as the primary market pursuant
to procedures adopted by the Trustees); (2) all other portfolio securities
for which over-the-counter market quotations are readily available are valued
at the latest 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 Dean Witter InterCapital Inc. (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
<PAGE>
DEAN WITTER AMERICAN VALUE FUND
NOTES TO FINANCIAL STATEMENTS December 31, 1997, continued
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 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 record 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.
2. INVESTMENT MANAGEMENT AGREEMENT
Pursuant to an Investment Management Agreement with the Investment Manager,
the Fund pays a management fee, accrued daily and payable monthly, by
applying the following annual rates to the net
<PAGE>
DEAN WITTER AMERICAN VALUE FUND
NOTES TO FINANCIAL STATEMENTS December 31, 1997, continued
assets of the Fund determined at the close of each business day: 0.625% to
the portion of daily net assets not exceeding $250 million; 0.50% to the
portion of daily net assets exceeding $250 million but not exceeding $2.5
billion and 0.475% to the portion of daily net assets exceeding $2.5 billion
but not exceeding $3.5 billion. Effective May 1, 1997, the Agreement was
amended to reduce the annual rate to 0.45% of the portion of daily net assets
in excess of $3.5 billion.
Under the terms of the Agreement, in addition to managing the Fund's
investments, the Investment Manager maintains certain of the Fund's books and
records and furnishes, at its own expense, office space, facilities,
equipment, clerical, bookkeeping and certain legal services and pays the
salaries of all personnel, including officers of the Fund who are employees
of the Investment Manager. The Investment Manager also bears the cost of
telephone services, heat, light, power and other utilities provided to the
Fund.
3. PLAN OF DISTRIBUTION
Shares of the Fund are distributed by Dean Witter Distributors Inc. (the
"Distributor"), an affiliate of the Investment Manager. The Fund has adopted
a Plan of Distribution (the "Plan") pursuant to Rule 12b-1 under the Act. The
Plan provides that the Fund will pay the Distributor a fee which is accrued
daily and paid monthly at the following annual rates: (i) Class A - up to
0.25% of the average daily net assets of Class A; (ii) Class B - 1.0% of the
lesser of: (a) the average daily aggregate gross sales of the Class B shares
since the inception of the Fund (not including reinvestment of dividend or
capital gain distributions) less the average daily aggregate net asset value
of the Class B shares redeemed since the Fund's inception upon which a
contingent deferred sales charge has been imposed or waived; or (b) the
average daily net assets of Class B; and (iii) Class C - up to 1.0% of the
average daily net assets of Class C. In the case of Class A shares, amounts
paid under the Plan are paid to the Distributor for services provided. In the
case of Class B and Class C shares, amounts paid under the Plan are paid to
the Distributor for services provided and the expenses borne by it and others
in the distribution of the shares of these Classes, including the payment of
commissions for sales of these Classes and incentive compensation to, and
expenses of, the account executives of Dean Witter Reynolds Inc. ("DWR"), an
affiliate of the Investment Manager and Distributor, and others who engage in
or support distribution of the shares or who service shareholder accounts,
including overhead and telephone expenses; printing and distribution of
prospectuses and reports used in connection with the offering of these shares
to other than current shareholders; and preparation, printing and
distribution of sales literature and advertising materials. In addition, the
Distributor may utilize fees paid pursuant to the Plan, in the case of Class
B
<PAGE>
DEAN WITTER AMERICAN VALUE FUND
NOTES TO FINANCIAL STATEMENTS December 31, 1997, continued
shares, to compensate DWR and other selected broker-dealers for their
opportunity costs in advancing such amounts, which compensation would be in
the form of a carrying charge on any unreimbursed expenses.
In the case of Class B shares, 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, including carrying charges, totaled $72,540,376 at December
31, 1997.
In the case of Class A shares and Class C shares, expenses incurred pursuant
to the Plan in any calendar year in excess of 0.25% or 1.0% of the average
daily net assets of Class A or Class C, respectively, will not be reimbursed
by the Fund through payments in any subsequent year, except that expenses
representing a gross sales credit to account executives may be reimbursed in
the subsequent calendar year. For the period ended December 31, 1997, 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 December 31,
1997, it received contingent deferred sales charges from certain redemptions
of the Fund's Class B shares and Class C shares of $4,721,534 and $3,192,
respectively and received $202,038 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 December 31, 1997
aggregated $9,245,904,533 and $9,254,551,447, respectively. Included in the
aforementioned are purchases and sales of U.S. Government securities of
$410,926,244 and $180,464,206, respectively.
For the year ended December 31, 1997, the Fund incurred $1,122,089 in
brokerage commissions with DWR for portfolio transactions executed on behalf
of the Fund.
At December 31, 1997, the Fund's payable for investments purchased included
unsettled trades with DWR of $8,367,064.
<PAGE>
DEAN WITTER AMERICAN VALUE FUND
NOTES TO FINANCIAL STATEMENTS December 31, 1997, continued
For the period May 31, 1997 through December 31, 1997, the Fund incurred
brokerage commissions of $551,901 with Morgan Stanley & Co., Inc., an
affiliate of the Investment Manager since May 31, 1997, for portfolio
transactions executed on behalf of the Fund. At December 31, 1997 the Fund's
payable for investments purchased and receivable for investments sold
included unsettled trades with Morgan Stanley & Co., Inc., of $4,206,932 and
$4,914,567, respectively.
Dean Witter Trust FSB, an affiliate of the Investment Manager and
Distributor, is the Fund's transfer agent. At December 31, 1997, the Fund had
transfer agent fees and expenses payable of approximately $54,000.
The Fund has an unfunded noncontributory defined benefit pension plan
covering all independent Trustees of the Fund who will have served as
independent Trustees for at least five years at the time of retirement.
Benefits under this plan are based on years of service and compensation
during the last five years of service. Aggregate pension costs for the year
ended December 31, 1997 included in Trustees' fees and expenses in the
Statement of Operations amounted to $4,301. At December 31, 1997, the Fund
had an accrued pension liability of $42,030 which is included in accrued
expenses in the Statement of Assets and Liabilities.
5. FEDERAL INCOME TAX STATUS
As of December 31, 1997, 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 permanent differences accumulated net
realized gain was charged $11,955,606 and accumulated net investment loss was
credited $11,955,606.
<PAGE>
DEAN WITTER AMERICAN VALUE FUND
NOTES TO FINANCIAL STATEMENTS December 31, 1997, continued
6. SHARES OF BENEFICIAL INTEREST
Transactions in shares of beneficial interest were as follows:
<TABLE>
<CAPTION>
FOR THE YEAR FOR THE YEAR
ENDED ENDED
DECEMBER 31, 1997+ DECEMBER 31, 1996
------------------------------- ------------------------------
SHARES AMOUNT SHARES AMOUNT
-------------- --------------- -------------- --------------
<S> <C> <C> <C> <C>
CLASS A SHARES*
Sold ....................................... 539,039 $ 17,439,944 -- --
Reinvestment of distributions............... 57,321 1,665,172 -- --
Redeemed.................................... (60,986) (2,023,896) -- --
-------------- --------------- -------------- ---------------
Net increase - Class A...................... 535,374 17,081,220 -- --
-------------- --------------- -------------- ---------------
CLASS B SHARES
Sold ....................................... 26,893,089 818,085,006 36,925,212 $1,016,961,498
Reinvestment of dividends and
distributions.............................. 22,224,675 644,669,591 10,599,054 286,147,878
Redeemed ................................... (24,498,814) (739,128,498) (20,736,856) (571,648,354)
-------------- --------------- -------------- ---------------
Net increase - Class B...................... 24,618,950 723,626,099 26,787,410 731,461,022
-------------- --------------- -------------- ---------------
CLASS C SHARES*
Sold ....................................... 387,776 12,691,589 -- --
Reinvestment of distributions............... 46,319 1,340,948 -- --
Redeemed ................................... (20,228) (667,646) -- --
-------------- --------------- -------------- ---------------
Net increase - Class C...................... 413,867 13,364,891 -- --
-------------- --------------- -------------- ---------------
CLASS D SHARES*
Sold ....................................... 332,349 10,839,979 -- --
Reinvestment of distributions............... 208,632 6,067,022 -- --
Redeemed ................................... (45,049) (1,470,098) -- --
-------------- --------------- -------------- ---------------
Net increase - Class D...................... 495,932 15,436,903 -- --
-------------- --------------- -------------- ---------------
Net increase in Fund ....................... 26,064,123 $ 769,509,113 26,787,410 $ 731,461,022
============== =============== ============== ===============
</TABLE>
- ------------
+ On July 28, 1997, 1,183,904 shares representing $37,731,024 were
transferred to Class D.
* For the period July 28, 1997 (issue date) through December 31, 1997.
<PAGE>
DEAN WITTER AMERICAN VALUE FUND
FINANCIAL HIGHLIGHTS
Selected ratios and per share data for a share of beneficial interest
outstanding throughout each period:
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
--------------------------------------------------------------------------------------------------
1997*++ 1996 1995 1994 1993 1992 1991 1990 1989 1988
- ----------------------------- --------- --------- -------- --------- --------- -------- -------- --------- -------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
CLASS B SHARES
PER SHARE OPERATING
PERFORMANCE:
Net asset value, beginning of
period ...................... $27.01 $27.16 $21.21 $23.10 $20.93 $20.66 $14.39 $14.81 $13.19 $12.21
--------- --------- -------- --------- --------- -------- -------- --------- -------- --------
Net investment income (loss) . (0.10) (0.08) 0.01 -- (0.09) 0.03 0.05 0.24 0.34 0.29
Net realized and unrealized
gain (loss) ................. 8.34 2.86 8.87 (1.57) 3.94 0.71 7.90 (0.38) 2.99 1.03
--------- --------- -------- --------- --------- -------- -------- --------- -------- --------
Total from investment
operations .................. 8.24 2.78 8.88 (1.57) 3.85 0.74 7.95 (0.14) 3.33 1.32
--------- --------- -------- --------- --------- -------- -------- --------- -------- --------
Less dividends and
distributions from:
net investment income ...... -- (0.01) -- -- (0.01) (0.03) (0.03) (0.28) (0.32) (0.33)
Net realized gain ........... (5.74) (2.92) (2.93) (0.32) (1.67) (0.44) (1.65) -- (1.39) --
Paid-in-capital ............. -- -- -- -- -- -- -- -- -- (0.01)
--------- --------- -------- --------- --------- -------- -------- --------- -------- --------
Total dividends and
distributions ............... (5.74) (2.93) (2.93) (0.32) (1.68) (0.47) (1.68) (0.28) (1.71) (0.34)
--------- --------- -------- --------- --------- -------- -------- --------- -------- -------
Net asset value, end of
period ...................... $29.51 $27.01 $27.16 $21.21 $23.10 $20.93 $20.66 $14.39 $14.81 $13.19
========= ========= ======== ========= ========= ======== ======== ========= ======== ========
TOTAL INVESTMENT RETURN+ .... 31.55% 10.53% 42.20% (6.75)% 18.70% 3.84% 56.26% (0.90)% 25.39% 10.84%
RATIOS TO AVERAGE NET ASSETS:
Expenses...................... 1.46% 1.53% 1.61% 1.71% 1.61% 1.72% 1.58% 1.70% 1.66% 1.78%
Net investment income (loss) . (0.34)% (0.33)% 0.06% 0.01% (0.59)% 0.18% 0.29% 1.67% 2.23% 2.15%
SUPPLEMENTAL DATA:
net assets, end of period, in
millions..................... $4,078 $3,099 $2,389 $1,490 $1,218 $459 $227 $89 $100 $90
Portfolio turnover rate ..... 275% 279% 256% 295% 276% 305% 264% 234% 196% 133%
Average commission rate paid . $0.0563 $0.0590 -- -- -- -- -- -- -- --
</TABLE>
- ------------
* Prior to July 28, 1997, the Fund issued one class of shares. All shares
of the Fund held prior to that date, other than shares which were
purchased prior to April 30, 1984 (and with respect to such shares,
certain shares acquired through reinvestment of dividends and capital
gains distributions (collectively the "Old Shares")), have been
designated Class B shares. The Old Shares have been designated Class D
shares.
++ 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.
SEE NOTES TO FINANCIAL STATEMENTS
<PAGE>
DEAN WITTER AMERICAN VALUE FUND
FINANCIAL HIGHLIGHTS, continued
<TABLE>
<CAPTION>
FOR THE PERIOD
JULY 28, 1997*
THROUGH
DECEMBER 31,
1997++
- ------------------------------------------ ------------------
<S> <C>
CLASS A SHARES
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period ..... $31.87
------------------
Net investment income ..................... 0.05
Net realized and unrealized gain .......... 2.32
------------------
Total from investment operations .......... 2.37
------------------
Less distributions from net realized gain (4.65)
------------------
Net asset value, end of period ............ $29.59
==================
TOTAL INVESTMENT RETURN+ .................. 7.70 %(1)
RATIOS TO AVERAGE NET ASSETS:
Expenses .................................. 0.92 %(2)
Net investment income ..................... 0.38 %(2)
SUPPLEMENTAL DATA:
Net assets, end of period, in thousands .. $15,844
Portfolio turnover rate ................... 275 %
Average commission rate paid .............. $0.0563
CLASS C SHARES
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period ..... $31.87
------------------
Net investment loss ....................... (0.05)
Net realized and unrealized gain .......... 2.32
------------------
Total from investment operations .......... 2.27
------------------
Less distributions from net realized gain . (4.65)
------------------
Net asset value, end of period ............ $29.49
==================
TOTAL INVESTMENT RETURN+ .................. 7.39 %(1)
RATIOS TO AVERAGE NET ASSETS:
Expenses .................................. 1.66 %(2)
Net investment loss ....................... (0.36)%(2)
SUPPLEMENTAL DATA:
Net assets, end of period, in thousands .. $12,204
Portfolio turnover rate ................... 275 %
Average commission rate paid .............. $0.0563
</TABLE>
- ------------
* The date shares were first issued.
++ 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.
SEE NOTES TO FINANCIAL STATEMENTS
<PAGE>
DEAN WITTER AMERICAN VALUE FUND
FINANCIAL HIGHLIGHTS, continued
<TABLE>
<CAPTION>
FOR THE PERIOD
JULY 28, 1997*
THROUGH
DECEMBER 31,
1997++
- ------------------------------------------ ------------------
<S> <C>
CLASS D SHARES
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period ..... $31.87
------------------
Net investment income ..................... 0.07
Net realized and unrealized gain .......... 2.34
------------------
Total from investment operations .......... 2.41
------------------
Less distributions from net realized gain (4.65)
------------------
Net asset value, end of period ............ $29.63
==================
TOTAL INVESTMENT RETURN+ .................. 7.83%(1)
RATIOS TO AVERAGE NET ASSETS:
Expenses .................................. 0.64%(2)
Net investment income ..................... 0.50%(2)
SUPPLEMENTAL DATA:
Net assets, end of period, in thousands .. $49,772
Portfolio turnover rate ................... 275%
Average commission rate paid .............. $0.0563
</TABLE>
- ------------
* The date shares were first issued. Shareholders who held shares of the
Fund prior to July 28, 1997 (the date the Fund converted to a multiple
class share structure) should refer to the Financial Highlights of Class
B to obtain the historical per share data and ratio information of their
shares.
++ 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.
SEE NOTES TO FINANCIAL STATEMENTS
<PAGE>
DEAN WITTER AMERICAN VALUE FUND
REPORT OF INDEPENDENT ACCOUNTANTS
TO THE SHAREHOLDERS AND TRUSTEES
OF DEAN WITTER AMERICAN VALUE 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 Dean Witter
American Value Fund (the "Fund") at December 31, 1997, the results of its
operations for the year then ended, the changes in its net assets for each of
the two years in the period then ended and the financial highlights for each
of the periods presented, in conformity with generally accepted accounting
principles. These financial statements and financial highlights (hereafter
referred to as "financial statements") are the responsibility of the Fund's
management; our responsibility is to express an opinion on these financial
statements based on our audits. We conducted our audits of these financial
statements in accordance with generally accepted auditing standards which
require that we plan and perform the audit to obtain reasonable assurance
about whether the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts
and disclosures in the financial statements, assessing the accounting
principles used and significant estimates made by management, and evaluating
the overall financial statement presentation. We believe that our audits,
which included confirmation of securities at December 31, 1997 by
correspondence with the custodian and brokers and the application of
alternative auditing procedures where confirmations from brokers were not
received, provide a reasonable basis for the opinion expressed above.
PRICE WATERHOUSE LLP
1177 Avenue of the Americas
New York, New York 10036
February 6, 1998
<PAGE>
DEAN WITTER AMERICAN VALUE FUND
FEDERAL TAX NOTICE (unaudited)
1997 FEDERAL TAX NOTICE
For the year ended December 31, 1997, the Fund paid to shareholders the
following per share amounts from long-term capital gains. These distributions
are taxable as 28% rate gains or 20% rate gains, as indicated below:
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C CLASS D
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Portion of long-term capital gains taxable as:
28% rate gain ................................ $0.48 $0.72 $0.48 $0.48
20% rate gain ................................ 0.46 0.46 0.46 0.46
--------- --------- --------- ---------
Total.......................................... $0.94 $1.18 $0.94 $0.94
========= ========= ========= =========
</TABLE>
For the year ended December 31, 1997, 5.08% of the income dividends
qualified for the dividends received deduction available to corporations.
<PAGE>
TRUSTEES
Michael Bozic
Charles A. Fiumefreddo
Edwin J. Garn
John R. Haire
Wayne E. Hedien
Dr. Manuel H. Johnson
Michael E. Nugent
Philip J. Purcell
John L. Schroeder
OFFICERS
Charles A. Fiumefreddo
Chairman and Chief Executive Officer
Barry Fink
Vice President, Secretary and General Counsel
Anita H. Kolleeny
Vice President
Thomas F. Caloia
Treasurer
TRANSFER AGENT
Dean Witter Trust FSB
Harborside Financial Center - Plaza Two
Jersey City, New Jersey 07311
INDEPENDENT ACCOUNTANTS
Price Waterhouse LLP
1177 Avenue of the Americas
New York, New York 10036
INVESTMENT MANAGER
Dean Witter InterCapital Inc.
Two World Trade Center
New York, New York 10048
This report is submitted for the general information of shareholders of the
Fund. For more detailed information about the Fund, its officers and trustees,
fees, expenses and other pertinent information, please see the prospectus of
the Fund.
This report is not authorized for distribution to prospective investors in the
Fund unless preceded or accompanied by an effective prospectus.
DEAN WITTER
AMERICAN
VALUE FUND
ANNUAL REPORT
DECEMBER 31, 1997
<PAGE>
Morgan Stanley Dean Witter American Value Fund Two World Trade Center,
New York, New York 10048
Letter to Shareholders June 30, 1998
DEAR SHAREHOLDER:
As 1998 began, the financial markets were braced for a tangible impact from the
implosion seen in many of the world's developing countries, as well as Japan,
which comprise nearly 40 percent of the world economy. Thus far, however,
falloffs in these countries and the resulting plunge in worldwide interest
rates have stimulated the consumer and domestically oriented sectors in the
United States. More specifically, the drop in interest rates spurred a
refinancing boomlet, lowering monthly mortgage costs and leading to an
acceleration in housing and retail sales. Consumer spending bounded ahead to
levels not seen in a decade.
However, it also became apparent that the Asian drag manifested itself in the
more internationally oriented sectors of the U.S. economy, such as
manufacturing, capital goods and technology. Evidence continued to build
throughout the first six months of the year that these industries in particular
would bear the brunt of pricing pressure and falling unit growth. Earnings
disappointments proliferated in this segment of the economy.
PERFORMANCE
For the six-month period ended June 30, l998, Morgan Stanley Dean Witter
American Value Fund's Class A, B, C and D shares produced total returns of
20.17 percent, 19.86 percent, 19.70 percent and 20.28 percent, respectively.
Over the same period, the Standard & Poor's 500 Composite Stock Price Index
(S&P 500) and the Lipper Analytical Services, Inc. Growth Funds Index
registered total returns of 17.70 percent and 15.57 percent, respectively.
Performance of the Fund's share classes varies because of differing expenses.
Within the Lipper Growth Funds universe the Fund was ranked #52 out of 884
funds (top 6 percent) for the year ended June 30, 1998. For the 5 and 10 years
ended June 30, 1998, the Fund was ranked #156 out of 338
<PAGE>
Morgan Stanley Dean Witter American Value Fund
Letter to the Shareholders June 30, 1998, continued
growth funds (top 46 percent) and #33 out of 181 growth funds (top 18%),
respectively. Lipper rankings are based on total return and do not include any
sales charges.
POSITIONING OF THE FUND
The Fund was well-positioned for the developments of the first half of l998,
with the portfolio heavily tilted toward consumer and domestically oriented
industries. One area of emphasis, financial stocks, which as of June 30, 1998
represented nearly 14 percent of net assets, was characterized by bank (Wells
Fargo & Co., Mellon Bank Corp.), brokerage (Merrill Lynch & Co. Inc., Paine
Webber Group, Inc.) and life insurance (Equitable Companies, Inc., Travelers
Group, Inc.) holdings.
Another notable area of concentration, health care, represented approximately
12 percent of net assets and included primarily drug stocks (Bristol-Myers
Squibb Co., Schering-Plough Corp.), with some miscellaneous hospital- and
medical device-related stocks (HBO & Co., Medtronic, Inc.).
Consumer staples represented nearly 9 percent of net assets, and included drug
stores (Walgreen Co., Rite Aid Corp.), grocery stores (Safeway, Inc., Kroger
Co.), and household products (Colgate-Palmolive Co., Procter & Gamble Co.).
Nearly 7 percent of the Fund's net assets was exposed to media stocks, which
consisted primarily of radio (Chancellor Media Corp.), television (CBS Corp.)
and cable (Viacom, Inc.) issues.
The broad consumer cyclical segments of the market combined to represent nearly
15 percent of net assets and included retail (Lowe's Companies, Inc., Costco
Companies, Inc.) with some assorted automobile (Ford Motor Co., General Motors
Corp.), restaurant (Starbucks Corp., McDonald's corp.) and airline (Southwest
Airlines Co.) stocks.
The Fund had very limited manufacturing exposure and was underweighted in
technology issues, given record pricing pressure and slowing capital spending
trends.
LOOKING AHEAD
We believe that the manufacturing and capital goods sectors will increasingly
slow the consumer-oriented industries as the year progresses. Corporate
profitability is likely to experience increasing pressure from slower exports,
an increase in cheaper imports, rising wages (two-thirds of the average
company's costs) and little or no pricing flexibility. Against such a backdrop,
capital spending is expected to slow further while payroll growth diminishes,
potentially putting a cap on future consumer spending.
<PAGE>
Morgan Stanley Dean Witter American Value Fund
Letter to the Shareholders June 30, 1998, continued
Given this outlook, the Fund may reduce its consumer cyclical holdings over the
remainder of l998, and add to more defensive industries, such as consumer
staples, telecommunications and electric utilities. Interest rates may decline
to new lower levels, adding stability to the stock market, particularly to
those industries that may continue to deliver positive earnings growth.
We appreciate your support of Morgan Stanley Dean Witter American Value Fund
and look forward to continuing to serve your investment needs and objectives.
Very truly yours,
/S/ CHARLES A. FIUMEFREDDO
CHARLES A. FIUMEFREDDO
Chairman of the Board
<PAGE>
Morgan Stanley Dean Witter American Value Fund
Portfolio of Investments June 30, 1998 (unaudited)
NUMBER OF
SHARES VALUE
- -----------------------------------------------------------
COMMON STOCKS (87.3%)
Agriculture Related (0.3%)
320,000 Delta & Pine Land Co. ....... $ 14,240,000
--------------
Apparel & Footwear (0.2%)
248,800 Jones Apparel Group, Inc.*... 9,096,750
--------------
Auto Related (1.4%)
650,000 Ford Motor Co. .............. 38,350,000
510,000 General Motors Corp. ........ 34,074,375
--------------
72,424,375
--------------
Banks (3.8%)
1,602,000 Corporacion Bancaria de
Espana S.A. (Spain)......... 35,915,537
440,000 BankBoston Corp. ............ 24,475,000
9,725,000 Credito Italiano SpA
(Italy)..................... 50,820,580
340,000 Mellon Bank Corp. ........... 23,672,500
120,000 Morgan (J.P.) & Co., Inc. ... 14,055,000
255,000 NationsBank Corp. ........... 19,507,500
67,000 Wells Fargo & Co. ........... 24,723,000
--------------
193,169,117
--------------
Basic Cyclicals (0.5%)
355,000 DuPont (E.I.) de Nemours &
Co., Inc. .................. 26,491,875
--------------
Biotechnology (0.8%)
388,000 Centocor, Inc.*.............. 14,065,000
195,200 Genentech, Inc. (Special)*... 13,249,200
245,000 Quintiles Transnational
Corp.*...................... 12,035,625
--------------
39,349,825
--------------
Cable & Telecommunications (3.3%)
1,600,000 Comcast Corp. (Class A
Special).................... 64,900,000
845,000 Cox Communications, Inc.
(Class A)*.................. 40,929,687
<PAGE>
716,000 Time Warner, Inc. ........... 61,173,250
--------------
167,002,937
--------------
Capital Goods (1.4%)
810,000 General Electric Co. ........ 73,710,000
--------------
Communications Equipment (6.5%)
155,400 Alcatel Alsthom (France)..... 31,569,832
738,500 Alcatel Alsthom (ADR)
(France).................... 30,047,719
NUMBER OF
SHARES VALUE
- -----------------------------------------------------------
1,570,000 Ascend Communications,
Inc.*....................... $ 77,715,000
300,000 CIENA Corp.*................. 20,850,000
600,000 Cisco Systems, Inc.*......... 55,237,500
118,000 Glenayre Technologies,
Inc.*....................... 1,268,500
400,000 Loral Space & Communications
Ltd.*....................... 11,300,000
775,000 Lucent Technologies Inc. .... 64,470,312
395,000 Nokia Corp. (ADR) (Class A)
(Finland)................... 28,662,187
92,800 Northern Telecom Ltd.
(Canada).................... 5,266,400
135,000 Tellabs, Inc.*............... 9,660,937
--------------
336,048,387
--------------
Computer Hardware (0.9%)
500,000 Dell Computer Corp.*......... 46,375,000
--------------
Computer Software (5.5%)
740,000 BMC Software, Inc.*.......... 38,433,750
251,000 CBT Group Public Limited Co.
(ADR) (Ireland)*............ 13,428,500
900,000 Computer Associates
International, Inc. ........ 50,006,250
625,000 Compuware Corp.*............. 31,914,062
700,000 Legato Systems, Inc.*........ 27,300,000
700,000 Microsoft Corp.*............. 75,862,500
675,000 Platinum Technology, Inc.*... 19,279,687
158,000 Software AG Systems, Inc.*... 4,621,500
535,000 Veritas Software Corp.*...... 22,102,187
--------------
282,948,436
--------------
Construction (1.6%)
400,000 Masco Corp. ................. 24,200,000
1,000,000 Maytag Corp. ................ 49,375,000
<PAGE>
150,000 Whirlpool Corp. ............. 10,312,500
--------------
83,887,500
--------------
Consumer - Noncyclical (3.4%)
544,700 Clorox Co. .................. 51,950,762
300,000 Colgate-Palmolive Co. ....... 26,400,000
85,850 Groupe Danone (France)....... 23,617,782
5,440 Nestle S.A. (Registered)
(Switzerland)............... 11,624,911
245,000 Procter & Gamble Co. ........ 22,310,312
440,000 Rubbermaid, Inc. ............ 14,602,500
600,000 Seagram Co. Ltd. (Canada).... 24,562,500
--------------
175,068,767
--------------
See Notes to Financial Statements
<PAGE>
Morgan Stanley Dean Witter American Value Fund
Portfolio of Investments June 30, 1998 (unaudited) continued
NUMBER OF
SHARES VALUE
- -----------------------------------------------------------
Consumer Business Services (2.6%)
235,800 Apollo Group, Inc. (Class
A)*......................... $ 7,796,138
520,000 Automatic Data Processing,
Inc. ....................... 37,895,000
300,000 Gartner Group, Inc. (Class
A)*......................... 10,481,250
609,300 Paychex, Inc. ............... 24,752,813
600,000 Snyder Communications,
Inc.*....................... 26,400,000
575,000 U.S.A. Waste Services,
Inc.*....................... 28,390,625
--------------
135,715,826
--------------
Consumer Products (5.5%)
900,600 CVS Corp. ................... 35,067,113
1,361,000 Fred Meyer, Inc.*............ 57,842,500
1,100,000 Kroger Co.*.................. 47,162,500
1,110,000 Rite Aid Corp. .............. 41,694,375
1,401,000 Safeway, Inc.*............... 57,003,188
1,020,000 Walgreen Co. ................ 42,138,750
--------------
280,908,426
--------------
Drugs (8.0%)
500,000 ALZA Corp.*.................. 21,625,000
670,000 American Home Products
Corp. ...................... 34,672,500
540,000 Bristol-Myers Squibb Co. .... 62,066,250
1,280,000 Forest Laboratories, Inc.*... 45,760,000
405,000 Lilly (Eli) & Co. ........... 26,755,313
375,000 Merck & Co., Inc. ........... 50,156,250
430,000 Pfizer, Inc. ................ 46,735,625
620,000 Schering-Plough Corp. ....... 56,807,500
940,000 Warner-Lambert Co. .......... 65,212,500
--------------
409,790,938
--------------
Energy (1.1%)
180,000 Camco International Inc. .... 14,017,500
84,085 Coflexip, S.A. (ADR)
(France).................... 5,129,185
180,000 Cooper Cameron Corp.*........ 9,180,000
600,000 Global Industries Ltd.*...... 10,087,500
200,000 Halliburton Co. ............. 8,912,500
<PAGE>
115,000 Schlumberger Ltd. ........... 7,855,938
--------------
55,182,623
--------------
Entertainment (1.1%)
1,081,000 Electronic Arts Inc.*........ 58,374,000
--------------
Financial - Miscellaneous (6.3%)
410,000 American Express Co. ........ 46,740,000
710,000 Amvescap PLC (United
Kingdom).................... 6,925,961
NUMBER OF
SHARES VALUE
- -----------------------------------------------------------
328,701 Associates First Capital
Corp. (Class A)............. $ 25,268,889
454,050 Edwards (A.G.), Inc. ........ 19,382,259
600,000 Fannie Mae................... 36,450,000
758,700 Freddie Mac.................. 35,706,319
500,000 Hambrecht & Quist Group*..... 18,156,250
335,000 Lehman Brothers Holdings,
Inc. ....................... 25,983,438
441,500 Merrill Lynch & Co., Inc. ... 40,728,375
600,000 Paine Webber Group, Inc. .... 25,725,000
525,000 Providian Financial Corp. ... 41,245,313
--------------
322,311,804
--------------
Healthcare Products & Services (2.5%)
1,344,000 HBO & Co. ................... 47,376,000
960,000 Health Management Associates,
Inc. (Class A)*............. 32,100,000
400,000 Healthsouth Corp.*........... 10,675,000
1,114,796 Total Renal Care Holdings,
Inc.*....................... 38,460,462
--------------
128,611,462
--------------
Insurance (3.7%)
700,000 Equitable Companies, Inc. ... 52,456,250
200,000 Hartford Financial Services
Group Inc. ................. 22,875,000
200,205 Marsh & McLennan Companies,
Inc. ....................... 12,099,890
182,900 Nationwide Financial
Services, Inc. (Class A).... 9,327,900
300,000 ReliaStar Financial Corp. ... 14,400,000
560,000 SunAmerica Inc. ............. 32,165,000
125,000 Torchmark Corp. ............. 5,718,750
640,000 Travelers Group, Inc. ....... 38,800,000
--------------
187,842,790
--------------
Internet (4.4%)
<PAGE>
380,000 Amazon.com, Inc.*............ 37,881,250
685,000 America Online, Inc.......... 72,610,000
300,000 At Home Corp. (Series A)*.... 14,175,000
150,000 Inktomi Corp.*............... 5,943,750
650,000 Intuit Inc.*................. 39,812,500
143,100 Preview Travel, lnc.*........ 4,892,231
325,000 Yahoo! Inc.*................. 51,146,875
--------------
226,461,606
--------------
Media Group (6.5%)
1,105,000 CBS Corp. ................... 35,083,750
1,010,000 Chancellor Media Corp.*...... 50,121,250
See Notes to Financial Statements
<PAGE>
Morgan Stanley Dean Witter American Value Fund
Portfolio of Investments June 30, 1998 (unaudited) continued
NUMBER OF
SHARES VALUE
- -----------------------------------------------------------
480,000 Clear Channel Communications,
Inc.*....................... $ 52,380,000
438,000 Jacor Communications,
Inc.*....................... 25,842,000
1,205,000 News Corp., Ltd. (ADR)
(Australia)................. 38,710,625
1,462,500 Outdoor Systems, Inc.*....... 40,950,000
623,100 Univision Communications,
Inc. (Class A)*............. 23,210,475
600,000 USA Networks, Inc.*.......... 15,075,000
865,000 Viacom, Inc. (Class B)*...... 50,386,250
53,800 Young & Rubicam, Inc.*....... 1,721,600
--------------
333,480,950
--------------
Medical Supplies (1.7%)
330,000 Becton, Dickinson & Co. ..... 25,616,250
230,000 Boston Scientific Corp.*..... 16,473,750
350,900 Medtronic, Inc. ............. 22,369,875
285,300 Sofamor Danek Group, Inc.*... 24,696,281
--------------
89,156,156
--------------
Restaurants (2.5%)
766,700 Brinker International,
Inc.*....................... 14,758,975
495,000 Cracker Barrell Old Country
Store, Inc. ................ 15,716,250
500,000 McDonald's Corp. ............ 34,500,000
700,000 Outback Steakhouse, Inc.*.... 27,256,250
650,000 Starbucks Corp.*............. 34,693,750
--------------
126,925,225
--------------
Retail (10.4%)
362,595 Abercrombie & Fitch Co.
(Class A)*.................. 15,954,180
401,000 Barnes & Noble, Inc.*........ 15,012,438
955,000 Costco Companies, Inc.*...... 60,224,688
1,200,000 Dayton Hudson Corp. ......... 58,200,000
150,000 Dollar General Corp. ........ 5,934,375
300,000 Dollar Tree Stores, Inc.*.... 12,150,000
700,000 Family Dollar Stores,
Inc. ....................... 12,950,000
700,000 Gap, Inc. (The).............. 43,137,500
200,000 Hasbro, Inc. ................ 7,862,500
<PAGE>
645,000 Home Depot, Inc. ............ 53,575,313
2,250,000 Kmart Corp.*................. 43,312,500
1,360,000 Limited (The), Inc. ......... 45,050,000
1,600,000 Lowe's Companies, Inc. ...... 64,900,000
NUMBER OF
SHARES VALUE
- -----------------------------------------------------------
512,500 Proffitt's, Inc.*............ $ 20,692,188
1,000,000 TJX Companies, Inc. ......... 24,125,000
810,000 Wal-Mart Stores, Inc. ....... 49,207,500
--------------
532,288,182
--------------
Telecommunications (1.0%)
650,000 AirTouch Communications,
Inc.*....................... 37,984,375
73,000 ICG Communications, Inc.*.... 2,664,500
211,500 Intermedia Communications
Inc.*....................... 8,856,563
--------------
49,505,438
--------------
Transportation (0.4%)
760,000 Southwest Airlines Co. ...... 22,515,535
--------------
TOTAL COMMON STOCKS
(Identified Cost
$3,613,569,234).............. 4,478,883,930
--------------
PRINCIPAL
AMOUNT IN
THOUSANDS
- ----------
U.S. GOVERNMENT OBLIGATIONS
(9.3%)
$ 161,000 U.S. Treasury Strip 0.00% due
05/15/19.................... 48,747,580
188,000 U.S. Treasury Strip 0.00% due
11/15/19.................... 55,319,000
200,000 U.S. Treasury Strip 0.00% due
05/15/20.................... 57,160,000
262,000 U.S. Treasury Strip 0.00% due
02/15/21.................... 71,730,360
190,600 U.S. Treasury Strip 0.00% due
05/15/21.................... 51,446,752
163,400 U.S. Treasury Strip 0.00% due
08/15/21.................... 43,474,204
142,500 U.S. Treasury Bond 6.125% due
11/15/27.................... 152,541,975
--------------
<PAGE>
TOTAL U.S. GOVERNMENT
OBLIGATIONS (Identified Cost
$467,523,889)............... 480,419,871
--------------
See Notes to Financial Statements
<PAGE>
Morgan Stanley Dean Witter American Value Fund
Portfolio of Investments June 30, 1998 (unaudited) continued
PRINCIPAL
AMOUNT IN
THOUSANDS VALUE
- -----------------------------------------------------------
SHORT-TERM INVESTMENTS (3.8%)
U.S. GOVERNMENT AGENCY (a) (3.4%)
$ 177,000 Federal Home Loan Mortgage
Corp. 5.85% due 07/01/98
(Amortized Cost
$177,000,000)............... 177,000,000
--------------
REPURCHASE AGREEMENT (0.4%)
18,127 The Bank of New York 5.50%
due 07/01/98 (dated
06/30/98, proceeds
$18,129,401)(b) (Identified
Cost $18,126,632)........... 18,126,632
--------------
TOTAL SHORT-TERM INVESTMENTS
(Identified Cost $195,126,632)... 195,126,632
--------------
$5,154,430,433
TOTAL INVESTMENTS
(Identified Cost $4,276,219,755)
(c)................................ 100.4%
(21,075,206)
LIABILITIES IN EXCESS OF
OTHER ASSETS........................ (0.4)
---- --------------
$5,133,355,227
NET ASSETS......................... 100.0%
---- ==============
----
- ---------------------
ADR American Depository Receipt.
* Non-income producing security.
(a) Security was purchased on a discount basis. The interest rate shown has
been adjusted to reflect a money market equivalent yield.
(b) Collateralized by $18,270,720 U.S. Treasury Note 5.50% due 03/31/03 valued
at $18,489,164.
(c) The aggregate cost for federal income tax purposes approximates identified
cost. The
<PAGE>
aggregate gross unrealized appreciation is $909,533,339 and the aggregate
gross unrealized depreciation is $31,322,661, resulting in net unrealized
appreciation of $878,210,678.
See Notes to Financial Statements
<PAGE>
Morgan Stanley Dean Witter American Value Fund
Financial Statements
STATEMENT OF ASSETS AND LIABILITIES
June 30, 1998 (unaudited)
ASSETS:
Investments in securities, at value
(identified cost $4,276,219,755)........................... $5,154,430,433
Receivable for:
Shares of beneficial interest sold...................... 12,815,151
Dividends............................................... 1,594,192
Interest................................................ 1,117,505
Foreign withholding taxes reclaimed..................... 539,649
Prepaid expenses and other assets........................... 318,255
--------------
TOTAL ASSETS............................................ 5,170,815,185
--------------
LIABILITIES:
Payable for:
Investments purchased................................... 22,716,294
Shares of beneficial interest repurchased............... 8,130,738
Plan of distribution fee................................ 3,189,460
Investment management fee............................... 2,081,111
Distributions to shareholders........................... 1,105,084
Accrued expenses and other payables......................... 237,271
--------------
TOTAL LIABILITIES....................................... 37,459,958
--------------
NET ASSETS.............................................. $5,133,355,227
==============
COMPOSITION OF NET ASSETS:
Paid-in-capital............................................. $3,794,135,486
Net unrealized appreciation................................. 878,207,908
Accumulated net investment loss............................. (4,962,481)
Accumulated undistributed net realized gain................. 465,974,314
--------------
NET ASSETS.............................................. $5,133,355,227
==============
CLASS A SHARES:
Net Assets.................................................. $51,570,679
Shares Outstanding (unlimited authorized, $.01 par value)... 1,502,188
NET ASSET VALUE PER SHARE............................... $34.33
==============
MAXIMUM OFFERING PRICE PER SHARE,
(net asset value plus 5.54% of net asset value)........ $36.23
==============
CLASS B SHARES:
Net Assets.................................................. $4,979,373,633
Shares Outstanding (unlimited authorized, $.01 par value)... 145,855,301
NET ASSET VALUE PER SHARE............................... $34.14
==============
CLASS C SHARES:
Net Assets.................................................. $29,060,117
Shares Outstanding (unlimited authorized, $.01 par value)... 852,912
<PAGE>
NET ASSET VALUE PER SHARE............................... $34.07
==============
CLASS D SHARES:
Net Assets.................................................. $73,350,798
Shares Outstanding (unlimited authorized, $.01 par value)... 2,131,401
NET ASSET VALUE PER SHARE............................... $34.41
==============
See Notes to Financial Statements
<PAGE>
Morgan Stanley Dean Witter American Value Fund
Financial Statements, continued
STATEMENT OF OPERATIONS
For the six months ended June 30, 1998 (unaudited) NET INVESTMENT INCOME:
INCOME
Dividends (net of $541,538 foreign withholding tax)......... $ 14,685,560
Interest.................................................... 11,521,603
------------
TOTAL INCOME............................................ 26,207,163
------------
EXPENSES
Plan of distribution fee (Class A shares)................... 37,490
Plan of distribution fee (Class B shares)................... 17,128,054
Plan of distribution fee (Class C shares)................... 95,530
Investment management fee................................... 11,192,065
Transfer agent fees and expenses............................ 2,183,305
Registration fees........................................... 170,723
Custodian fees.............................................. 141,112
Shareholder reports and notices............................. 124,909
Professional fees........................................... 28,496
Trustees' fees and expenses................................. 10,056
Other....................................................... 15,874
------------
TOTAL EXPENSES.......................................... 31,127,614
------------
NET INVESTMENT LOSS..................................... (4,920,451)
------------
NET REALIZED AND UNREALIZED GAIN:
Net realized gain........................................... 487,141,683
Net change in unrealized appreciation....................... 357,182,317
------------
NET GAIN................................................ 844,324,000
------------
NET INCREASE................................................ $839,403,549
============
See Notes to Financial Statements
<PAGE>
Morgan Stanley Dean Witter American Value Fund
Financial Statements, continued
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
FOR THE SIX FOR THE YEAR
MONTHS ENDED ENDED
JUNE 30, 1998 DECEMBER 31, 1997*
- ----------------------------------------------------------------------------------------
(unaudited)
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
OPERATIONS:
Net investment loss................................ $ (4,920,451) $ (11,954,379)
Net realized gain.................................. 487,141,683 738,335,473
Net change in unrealized appreciation.............. 357,182,317 251,384,827
-------------- --------------
NET INCREASE................................... 839,403,549 977,765,921
-------------- --------------
DISTRIBUTIONS TO SHAREHOLDERS FROM NET REALIZED
GAIN:
Class A shares..................................... (1,562,807) (1,747,209)
Class B shares..................................... (169,191,735) (680,450,520)
Class C shares..................................... (951,647) (1,454,608)
Class D shares..................................... (2,441,072) (6,581,680)
-------------- --------------
TOTAL DISTRIBUTIONS............................ (174,147,261) (690,234,017)
-------------- --------------
Net increase from transactions in shares of
beneficial interest............................... 312,207,439 769,509,113
-------------- --------------
<PAGE>
NET INCREASE................................... 977,463,727 1,057,041,017
NET ASSETS:
Beginning of period................................ 4,155,891,500 3,098,850,483
-------------- --------------
END OF PERIOD
(Including net investment losses of $4,962,481
and $42,030, respectively)..................... $5,133,355,227 $4,155,891,500
============== ==============
</TABLE>
- ---------------
* Class A, Class C and Class D shares were issued July 28, 1997.
See Notes to Financial Statements
<PAGE>
Morgan Stanley Dean Witter American Value Fund
Notes to Financial Statements June 30, 1998 (unaudited)
1. ORGANIZATION AND ACCOUNTING POLICIES
Morgan Stanley Dean Witter American Value Fund (the "Fund"), formerly Dean
Witter American Value 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 capital growth consistent with an
effort to reduce volatility. The Fund seeks to achieve its objective by
investing in a diversified portfolio of securities consisting principally of
common stocks. The Fund was incorporated in Maryland in 1979, commenced
operations on March 27, 1980 and was reorganized as a Massachusetts business
trust on April 30, 1987. On July 28, 1997, the Fund commenced offering three
additional classes of shares, with the then current shares, other than shares
which were purchased prior to April 30, 1984 (and with respect to such shares,
certain shares acquired through reinvestment of dividends and capital gains
distributions (collectively the "Old Shares")), designated as Class B shares.
The Old Shares have been designated Class D shares.
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, 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
(in cases where a security is traded on more than one exchange, the security is
valued on the exchange designated as the primary market pursuant to procedures
adopted by the Trustees); (2) all other portfolio securities for which
over-the-counter market quotations are readily available are valued at the
latest 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 Morgan Stanley Dean Witter Advisors Inc. (the "Investment
Manager"), formerly Dean Witter InterCapital Inc., that sale or bid
<PAGE>
Morgan Stanley Dean Witter American Value Fund
Notes to Financial Statements June 30, 1998 (unaudited) continued
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 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 record 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.
<PAGE>
Morgan Stanley Dean Witter American Value Fund
Notes to Financial Statements June 30, 1998 (unaudited) continued
2. INVESTMENT MANAGEMENT AGREEMENT
Pursuant to an Investment Management Agreement with the Investment Manager, the
Fund pays a management fee, accrued daily and payable monthly, by applying the
following annual rates to the net assets of the Fund determined at the close of
each business day: 0.625% to the portion of daily net assets not exceeding $250
million; 0.50% to the portion of daily net assets exceeding $250 million but
not exceeding $2.5 billion; 0.475% to the portion of daily net assets exceeding
$2.5 billion but not exceeding $3.5 billion and 0.45% of the portion of daily
net assets in excess of $3.5 billion but not exceeding 4.5 billion. Effective
May 1, 1998, the Agreement was amended to reduce the annual rate to 0.425% of
the portion of daily net assets in excess of $4.5 billion.
Under the terms of the Agreement, in addition to managing the Fund's
investments, the Investment Manager maintains certain of the Fund's books and
records and furnishes, at its own expense, office space, facilities, equipment,
clerical, bookkeeping and certain legal services and pays the salaries of all
personnel, including officers of the Fund who are employees of the Investment
Manager. The Investment Manager also bears the cost of telephone services,
heat, light, power and other utilities provided to the Fund.
3. PLAN OF DISTRIBUTION
Shares of the Fund are distributed by Morgan Stanley Dean Witter Distributors
Inc. (the "Distributor"), an affiliate of the Investment Manager. The Fund has
adopted a Plan of Distribution (the "Plan") pursuant to Rule 12b-1 under the
Act. The Plan provides that the Fund will pay the Distributor a fee which is
accrued daily and paid monthly at the following annual rates: (i) Class A -- up
to 0.25% of the average daily net assets of Class A; (ii) Class B -- 1.0% of
the lesser of: (a) the average daily aggregate gross sales of the Class B
shares since the inception of the Fund (not including reinvestment of dividend
or capital gain distributions) less the average daily aggregate net asset value
of the Class B shares redeemed since the Fund's inception upon which a
contingent deferred sales charge has been imposed or waived; or (b) the average
daily net assets of Class B; and (iii) Class C -- up to 1.0% of the average
daily net assets of Class C. In the case of Class A shares, amounts paid under
the Plan are paid to the Distributor for services provided. In the case of
Class B and Class C shares, amounts paid under the Plan are paid to the
Distributor for services provided and the expenses borne by it and others in
the distribution of the shares of these Classes, including the payment of
commissions for sales of these Classes and incentive compensation to, and
expenses of, Morgan Stanley Dean Witter Financial Advisors and others who
engage in or support distribution of the shares or who service
<PAGE>
Morgan Stanley Dean Witter American Value Fund
Notes to Financial Statements June 30, 1998 (unaudited) continued
shareholder accounts, including overhead and telephone expenses; printing and
distribution of prospectuses and reports used in connection with the offering
of these shares to other than current shareholders; and preparation, printing
and distribution of sales literature and advertising materials. In addition,
the Distributor may utilize fees paid pursuant to the Plan, in the case of
Class B shares, to compensate Dean Witter Reynolds Inc. ("DWR"), an affiliate
of the Investment Manager and Distributor and other selected broker-dealers for
their opportunity costs in advancing such amounts, which compensation would be
in the form of a carrying charge on any unreimbursed expenses.
In the case of Class B shares, provided that the Plan continues in effect, any
cumulative expenses incurred by the Distributor but not yet recovered may be
recovered through the payment of future distribution fees from the Fund
pursuant to the Plan and contingent deferred sales charges paid by investors
upon redemption of Class B shares. Although there is no legal obligation for
the Fund to pay expenses incurred in excess of payments made to the Distributor
under the Plan and the proceeds of contingent deferred sales charges paid by
investors upon redemption of shares, if for any reason the Plan is terminated,
the Trustees will consider at that time the manner in which to treat such
expenses. The Distributor has advised the Fund that such excess amounts,
including carrying charges, totaled $75,785,615 at June 30, 1998.
In the case of Class A shares and Class C shares, expenses incurred pursuant to
the Plan in any calendar year in excess of 0.25% or 1.0% of the average daily
net assets of Class A or Class C, respectively, will not be reimbursed by the
Fund through payments in any subsequent year, except that expenses representing
a gross sales credit to Morgan Stanley Dean Witter Financial Advisors or other
selected broker-dealer representatives may be reimbursed in the subsequent
calendar year. For the six months ended June 30, 1998, the distribution fee was
accrued for Class A shares and Class C shares at the annual rate of 0.24% and
1.0%, respectively.
The Distributor has informed the Fund that for six months ended June 30, 1998,
it received contingent deferred sales charges from certain redemptions of the
Fund's Class A shares, Class B shares and Class C shares of $47, $2,238,741 and
$17,315, respectively and received $192,188 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.
<PAGE>
Morgan Stanley Dean Witter American Value Fund
Notes to Financial Statements June 30, 1998 (unaudited) continued
4. SECURITY TRANSACTIONS AND TRANSACTIONS WITH AFFILIATES
The cost of purchases and proceeds from sales of portfolio securities,
excluding short-term investments, for the six months ended June 30, 1998,
aggregated $5,632,336,181 and $5,467,849,046, respectively. Included in the
aforementioned are purchases and sales of U.S. Government securities of
$573,978,399 and $502,919,566, respectively.
For the six months ended June 30, 1998, the Fund incurred $6,085 in brokerage
commissions with DWR for portfolio transactions executed on behalf of the Fund.
For the six months ended June 30, 1998, the Fund incurred brokerage commissions
of $1,068,841 with Morgan Stanley & Co., Inc., an affiliate of the Investment
Manager, for portfolio transactions executed on behalf of the Fund.
Morgan Stanley Dean Witter Trust FSB, an affiliate of the Investment Manager
and Distributor, is the Fund's transfer agent.
The Fund has an unfunded noncontributory defined benefit pension plan covering
all independent Trustees of the Fund who will have served as independent
Trustees for at least five years at the time of retirement. Benefits under this
plan are based on years of service and compensation during the last five years
of service. Aggregate pension costs for the six months ended June 30, 1998
included in Trustees' fees and expenses in the Statement of Operations amounted
to $2,978. At June 30, 1998, the Fund had an accrued pension liability of
$42,638 which is included in accrued expenses in the Statement of Assets and
Liabilities.
5. FEDERAL INCOME TAX STATUS
As of December 31, 1997, the Fund had temporary book/tax differences primarily
attributable to capital loss deferrals on wash sales.
<PAGE>
Morgan Stanley Dean Witter American Value Fund
Notes to Financial Statements June 30, 1998 (unaudited) continued
6. SHARES OF BENEFICIAL INTEREST
Transactions in shares of beneficial interest were as follows:
<TABLE>
<CAPTION>
FOR THE FOR THE
MONTHS ENDED YEAR ENDED
JUNE 30, 1998 DECEMBER 31, 1997+*
--------------------------- ---------------------------
(unaudited)
SHARES AMOUNT SHARES AMOUNT
----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
CLASS A SHARES
Sold........................................................ 1,068,848 $ 34,746,336 539,039 $ 17,439,944
Reinvestment of distributions............................... 45,230 1,517,920 57,321 1,665,172
Redeemed.................................................... (147,264) (4,873,324) (60,986) (2,023,896)
----------- ------------- ----------- -------------
Net increase - Class A...................................... 966,814 31,390,932 535,374 17,081,220
----------- ------------- ----------- -------------
CLASS B SHARES
Sold........................................................ 16,462,197 530,585,984 26,893,089 818,085,006
Reinvestment of distributions............................... 4,799,633 160,211,773 22,224,675 644,669,591
Redeemed.................................................... (13,592,094) (438,904,655) (24,498,814) (739,128,498)
----------- ------------- ----------- -------------
Net increase - Class B...................................... 7,669,736 251,893,102 24,618,950 723,626,099
----------- ------------- ----------- -------------
CLASS C SHARES
Sold........................................................ 652,679 21,176,322 387,776 12,691,589
Reinvestment of distributions............................... 27,004 899,491 46,319 1,340,948
<PAGE>
Redeemed.................................................... (240,638) (7,822,473) (20,228) (667,646)
----------- ------------- ----------- -------------
Net increase - Class C...................................... 439,045 14,253,340 413,867 13,364,891
----------- ------------- ----------- -------------
CLASS D SHARES
Sold........................................................ 492,523 15,954,274 332,349 10,839,979
Reinvestment of distributions............................... 65,618 2,207,382 208,632 6,067,022
Redeemed.................................................... (106,576) (3,491,591) (45,049) (1,470,098)
----------- ------------- ----------- -------------
Net increase - Class D...................................... 451,565 14,670,065 495,932 15,436,903
----------- ------------- ----------- -------------
Net increase in Fund........................................ 9,527,160 $ 312,207,439 26,064,123 $ 769,509,113
=========== ============= =========== =============
</TABLE>
- ---------------------
+ On July 28, 1997 1,183,904 shares representing $37,731,024 were transferred
to Class D.
* For Class A, C and D shares, for the period July 28, 1997 (issue date)
through December 31, 1997.
<PAGE>
Morgan Stanley Dean Witter American Value Fund
Financial Highlights
Selected ratios and per share data for a share of beneficial interest
outstanding throughout each period:
<TABLE>
<CAPTION>
FOR THE SIX FOR THE YEAR ENDED DECEMBER 31,
MONTHS ENDED ----------------------------------------------------
JUNE 30, 1998++ 1997*++ 1996 1995 1994 1993
- ---------------------------------------------------------------------------------------------------------------------------------
(unaudited)
<S> <C> <C> <C> <C> <C> <C>
CLASS B SHARES
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period..................... $29.51 $27.01 $27.16 $21.21 $23.10 $20.93
------ ------ ------ ------ ------ ------
Net investment income (loss)............................. (0.04) (0.10) (0.08) 0.01 -- (0.09)
Net realized and unrealized gain (loss).................. 5.87 8.34 2.86 8.87 (1.57) 3.94
------ ------ ------ ------ ------ ------
Total from investment operations......................... 5.83 8.24 2.78 8.88 (1.57) 3.85
------ ------ ------ ------ ------ ------
Less dividends and distributions from:
Net investment income................................... -- -- (0.01) -- -- (0.01)
Net realized gain....................................... (1.20) (5.74) (2.92) (2.93) (0.32) (1.67)
------ ------ ------ ------ ------ ------
Total dividends and distributions........................ (1.20) (5.74) (2.93) (2.93) (0.32) (1.68)
------ ------ ------ ------ ------ ------
Net asset value, end of period........................... $34.14 $29.51 $27.01 $27.16 $21.21 $23.10
====== ====== ====== ====== ====== ======
<PAGE>
TOTAL INVESTMENT RETURN+................................. 19.86%(1) 31.55% 10.53% 42.20% (6.75)% 18.70%
RATIOS TO AVERAGE NET ASSETS:
Expenses................................................. 1.37%(2) 1.46% 1.53% 1.61% 1.71% 1.61%
Net investment income (loss)............................. (0.23)%(2) (0.34)% (0.33)% 0.06% 0.01% (0.59)%
SUPPLEMENTAL DATA:
Net assets, end of period, in millions................... $4,979 $4,078 $3,099 $2,389 $1,490 $1,218
Portfolio turnover rate.................................. 125%(1) 275% 279% 256% 295% 276%
</TABLE>
- ---------------------
* Prior to July 28, 1997, the Fund issued one class of shares. All shares of
the Fund held prior to that date, other than shares which were purchased
prior to April 30, 1984 (and with respect to such shares, certain shares
acquired through reinvestment of dividends and capital gains distributions
(collectively the "Old Shares")), have been designated Class B shares. The
Old Shares have been designated Class D shares.
++ 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.
See Notes to Financial Statements
<PAGE>
Morgan Stanley Dean Witter American Value Fund
Financial Highlights, continued
<TABLE>
<CAPTION>
FOR THE PERIOD
FOR THE SIX JULY 28, 1997*
MONTHS ENDED THROUGH
JUNE 30, 1998++ DECEMBER 31, 1997++
- ---------------------------------------------------------------------------------------------------
(unaudited)
<S> <C> <C>
CLASS A SHARES
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period........................ $29.59 $31.87
------ ------
Net investment income....................................... 0.05 0.05
Net realized and unrealized gain............................ 5.89 2.32
------ ------
Total from investment operations............................ 5.94 2.37
------ ------
Less distributions from net realized gain................... (1.20) (4.65)
------ ------
Net asset value, end of period.............................. $34.33 $29.59
====== ======
TOTAL INVESTMENT RETURN+.................................... 20.17%(1) 7.70%(1)
RATIOS TO AVERAGE NET ASSETS:
Expenses.................................................... 0.85%(2) 0.92%(2)
Net investment income....................................... 0.32%(2) 0.38%(2)
SUPPLEMENTAL DATA:
Net assets, end of period, in thousands..................... $51,571 $15,844
Portfolio turnover rate..................................... 125%(1) 275%
<PAGE>
CLASS C SHARES
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period........................ $29.49 $31.87
------ ------
Net investment loss......................................... (0.07) (0.05)
Net realized and unrealized gain............................ 5.85 2.32
------ ------
Total from investment operations............................ 5.78 2.27
------ ------
Less distributions from net realized gain................... (1.20) (4.65)
------ ------
Net asset value, end of period.............................. $34.07 $29.49
====== ======
TOTAL INVESTMENT RETURN+.................................... 19.70%(1) 7.39%(1)
RATIOS TO AVERAGE NET ASSETS:
Expenses.................................................... 1.61%(2) 1.66%(2)
Net investment loss......................................... (0.44)%(2) (0.36)%(2)
SUPPLEMENTAL DATA:
Net assets, end of period, in thousands..................... $29,060 $12,204
Portfolio turnover rate..................................... 125%(1) 275%
</TABLE>
- ---------------------
* The date shares were first issued.
++ 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
See Notes to Financial Statements
<PAGE>
TRUSTEES
Michael Bozic
Charles A. Fiumefreddo
Edwin J. Garn MORGAN STANLEY
John R. Haire DEAN WITTER
Wayne E. Hedien AMERICAN
Dr. Manuel H. Johnson VALUE FUND
Michael E. Nugent
Philip J. Purcell
John L. Schroeder
OFFICERS
Charles A. Fiumefreddo
Chairman and Chief Executive Officer
Barry Fink
Vice President, Secretary and General Counsel
Anita H. Kolleeny
Vice President
Thomas F. Caloia
Treasurer
TRANSFER AGENT
Morgan Stanley Dean Witter Trust FSB [PHOTO]
Harborside Financial Center - Plaza Two
Jersey City, New Jersey 07311
INDEPENDENT ACCOUNTANTS
PricewaterhouseCoopers LLP
1177 Avenue of the Americas
New York, New York 10036
INVESTMENT MANAGER
Morgan Stanley Dean Witter Advisors Inc.
Two World Trade Center
New York, New York 10048
The financial statements included herein have been taken from the
records of the Fund without examination by the independent accountants and
accordingly they do not express an opinion thereon.
This report is submitted for the general information of shareholders
of the Fund. For more detailed information about the Fund, its officers and
trustees, fees, expenses and other pertinent information, please see the
prospectus of the Fund.
This report is not authorized for distribution to prospective
investors in the Fund unless preceded or accompanied by an effective
prospectus.
SEMIANNUAL REPORT JUNE 30, 1998
<PAGE>
PROSPECTUS
JANUARY 29, 1998
Dean Witter Capital Appreciation Fund (the "Fund") is an open-end,
diversified management investment company whose investment objective is
long-term capital appreciation. The Fund seeks to meet its investment objective
by investing primarily in the common stocks of U.S. companies that, in the
opinion of the Investment Manager, offer the potential for either superior
earnings growth and/or appear to be undervalued. Current income is not an
objective of the Fund. (See "Investment Objective and Policies.")
The Fund offers four classes of shares (each, a "Class"), each
with a different combination of sales charges, ongoing fees and other features.
The different distribution arrangements permit an investor to choose the method
of purchasing shares that the investor believes is most beneficial given the
amount of the purchase, the length of time the investor expects to hold the
shares and other relevant circumstances. (See "Purchase of Fund
Shares--Alternative Purchase Arrangements.")
This Prospectus sets forth concisely the information you should
know before investing in the Fund. It should be read and retained for future
reference. Additional information about the Fund is contained in the Statement
of Additional Information, dated January 29, 1998, which has been filed with the
Securities and Exchange Commission, and which is available at no charge upon
request of the Fund at the address or telephone numbers listed on this page. The
Statement of Additional Information is incorporated herein by reference.
DEAN WITTER DISTRIBUTORS INC.
DISTRIBUTOR
TABLE OF CONTENTS
Prospectus Summary/2
Summary of Fund Expenses/4
Financial Highlights/6
The Fund and its Management/9
Investment Objective and Policies/9
Risk Considerations/11
Investment Restrictions/17
Purchase of Fund Shares/18
Shareholder Services/29
Redemptions and Repurchases/32
Dividends, Distributions and Taxes/33
Performance Information/34
Additional Information/34
SHARES OF THE FUND ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR ENDORSED
BY, ANY BANK, AND THE SHARES ARE NOT FEDERALLY INSURED BY THE FEDERAL DEPOSIT
INSURANCE CORPORATION, THE FEDERAL RESERVE BOARD, OR ANY OTHER AGENCY.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
Dean Witter
Capital Appreciation Fund
Two World Trade Center
New York, New York 10048
(212) 392-2550 or
(800) 869-NEWS (toll-free)
<PAGE>
PROSPECTUS SUMMARY
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
The The Fund is organized as a Trust, commonly known as a Massachusetts business trust, and is an open-end,
Fund diversified management investment company. The Fund invests primarily in the common stocks of U.S. companies
that, in the opinion of the Investment Manager, offer the potential for either superior earnings growth and/or
appear to be undervalued. Current income is not an objective of the Fund.
- ------------------------------------------------------------------------------------------------------------------------------------
Shares Offered Shares of beneficial interest with $.01 par value (see page 34). The Fund offers four Classes of shares, each
with a different combination of sales charges, ongoing fees and other features (see pages 18-28).
- ------------------------------------------------------------------------------------------------------------------------------------
Minimum The minimum initial investment for each Class is $1,000 ($100 if the account is opened through EasyInvest-SM-).
Purchase Class D shares are only available to persons investing $5 million ($25 million for certain qualified plans) or
more and to certain other limited categories of investors. For the purpose of meeting the minimum $5 million (or
$25 million) investment for Class D shares, and subject to the $1,000 minimum initial investment for each Class
of the Fund, an investor's existing holdings of Class A shares and shares of funds for which Dean Witter
InterCapital Inc. serves as investment manager ("Dean Witter Funds") that are sold with a front-end sales
charge, and concurrent investments in Class D shares of the Fund and other Dean Witter Funds that are multiple
class funds, will be aggregated. The minimum subsequent investment is $100 (see page 18).
- ------------------------------------------------------------------------------------------------------------------------------------
Investment The investment objective of the Fund is long-term capital appreciation (see page 9).
Objective
- ------------------------------------------------------------------------------------------------------------------------------------
Investment Dean Witter InterCapital Inc., the Investment Manager of the Fund, and its wholly-owned subsidiary, Dean Witter
Manager Services Company Inc., serve in various investment management, advisory, management and administrative
capacities to 103 investment companies and other portfolios with net assets under management of approximately
$102.9 billion at December 31, 1997 (see page 9).
- ------------------------------------------------------------------------------------------------------------------------------------
Management The Investment Manager receives a monthly fee at the annual rate of 0.75% of the portion of daily net assets not
Fee exceeding $500 million; and 0.725% of the portion of daily net assets exceeding $500 million (see page 9).
- ------------------------------------------------------------------------------------------------------------------------------------
Distributor and Dean Witter Distributors Inc. (the "Distributor"). The Fund has adopted a distribution plan pursuant to Rule
Distribution Fee 12b-1 under the Investment Company Act (the "12b-1 Plan") with respect to the distribution fees paid by the
Class A, Class B and Class C shares of the Fund to the Distributor. The entire 12b-1 fee payable by Class A and
a portion of the 12b-1 fee payable by each of Class B and Class C equal to 0.25% of the average daily net assets
of the Class are currently each characterized as a service fee within the meaning of the National Association of
Securities Dealers, Inc. guidelines. The remaining portion of the 12b-1 fee, if any, is characterized as an
asset-based sales charge (see pages 18 and 27).
- ------------------------------------------------------------------------------------------------------------------------------------
Alternative Four classes of shares are offered:
Purchase
Arrangements o Class A shares are offered with a front-end sales charge, starting at 5.25% and reduced for larger purchases.
Investments of $1 million or more (and investments by certain other limited categories of investors) are not
subject to any sales charge at the time of purchase but a contingent deferred sales charge ("CDSC") of 1.0% may
be imposed on redemptions within one year of purchase. The Fund is authorized to reimburse the Distributor for
specific expenses incurred in promoting the distribution of the Fund's Class A shares and servicing shareholder
accounts pursuant to the Fund's 12b-1 Plan. Reimbursement may in no event exceed an amount equal to payments at
an annual rate of 0.25% of average daily net assets of the Class (see pages 18, 21 and 27).
o Class B shares are offered without a front-end sales charge, but will in most cases be subject to a CDSC
(scaled down from 5.0% to 1.0%) if redeemed within six years after purchase. The CDSC will be
</TABLE>
- --------------------------------------------------------------------------------
2
<PAGE>
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
imposed on any redemption of shares if after such redemption the aggregate current value of a Class B account
with the Fund falls below the aggregate amount of the investor's purchase payments made during the six years
preceding the redemption. A different CDSC schedule applies to investments by certain qualified plans. Class B
shares are also subject to a 12b-1 fee assessed at the annual rate of 1.0% of the lesser of: (a) the average
daily net sales of the Fund's Class B shares or (b) the average daily net assets of Class B. All shares of the
Fund held prior to July 28, 1997 have been designated Class B shares. Shares held before May 1, 1997 will
convert to Class A shares in May, 2007. In all other instances, Class B shares convert to Class A shares
approximately ten years after the date of the original purchase (see pages 18, 23 and 27).
o Class C shares are offered without a front-end sales charge, but will in most cases be subject to a CDSC of
1.0% if redeemed within one year after purchase. The Fund is authorized to reimburse the Distributor for
specific expenses incurred in promoting the distribution of the Fund's Class C shares and servicing shareholder
accounts pursuant to the Fund's 12b-1 Plan. Reimbursement may in no event exceed an amount equal to payments at
an annual rate of 1.0% of average daily net assets of the Class (see pages 18, 26 and 27).
o Class D shares are offered only to investors meeting an initial investment minimum of $5 million ($25 million
for certain qualified plans) and to certain other limited categories of investors. Class D shares are offered
without a front-end sales charge or CDSC and are not subject to any 12b-1 fee (see pages 18, 26 and 27).
- ------------------------------------------------------------------------------------------------------------------------------------
Redemption Shares are redeemable by the shareholder at net asset value less any applicable CDSC on Class A, Class B or
Class C shares. An account may be involuntarily redeemed if the total value of the account is less than $100,
or, if the account was opened through EasyInvest-SM-, if after twelve months the shareholder has invested less
than $1,000 in the account (see page 32).
- ------------------------------------------------------------------------------------------------------------------------------------
Dividends and Dividends from net investment income are paid quarterly and distributions from net capital gains, if any, are
Capital Gains paid at least annually. The Fund may, however, determine to retain all or part of any net long-term capital
Distributions gains in any year for reinvestment. Dividends and capital gains distributions paid on shares of a Class are
automatically reinvested in additional shares of the same Class at net asset value unless the shareholder elects
to receive cash. Shares acquired by dividend and distribution reinvestment will not be subject to any sales
charge or CDSC (see pages 29 and 33).
- ------------------------------------------------------------------------------------------------------------------------------------
Risks The net asset value of the Fund's shares will fluctuate with changes in the market value of its portfolio
securities. The market value of the Fund's portfolio securities will increase or decrease due to a variety of
economic, market or political factors which cannot be predicted. The Fund is intended for long-term investors
who can accept the risks involved in seeking long-term capital appreciation through the investment primarily in
the securities of companies that offer the potential for either superior earnings growth and/or appear to be
undervalued. In selecting investments for the Fund, the Investment Manager has no general criteria as to a
company's asset size, earnings or industry type. It should be recognized that investing in such companies
involves greater risk than is customarily associated with investing in more established companies. The Fund may
invest in the securities of foreign issuers which entails additional risks. The Fund may also invest in futures
and options which may be considered speculative in nature and may involve greater risks than those customarily
assumed by other investment companies which do not invest in such instruments. An investment in shares of the
Fund should not be considered a complete investment program and is not appropriate for all investors. Investors
should carefully consider their ability to assume these risks and the risks outlined under the heading "Risk
Considerations," before making an investment in the Fund (see pages 11-16).
</TABLE>
- --------------------------------------------------------------------------------
The above is qualified in its entirety by the detailed information appearing
elsewhere in the Prospectus and in the Statement of Additional
Information.
3
<PAGE>
SUMMARY OF FUND EXPENSES
- --------------------------------------------------------------------------------
The following table illustrates all expenses and fees that a shareholder of
the Fund will incur. The expenses and fees set forth in the table are based on
the expenses and fees for the fiscal year ended November 30, 1997.
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C CLASS D
--------- ------- --------- -------
<S> <C> <C> <C> <C>
Shareholder Transaction Expenses
- --------------------------------------------------------------------------------
Maximum Sales Charge Imposed on Purchases (as a percentage of offering price)... 5.25%(1) None None None
Sales Charge Imposed on Dividend Reinvestments.................................. None None None None
Maximum Contingent Deferred Sales Charge (as a percentage of original purchase
price or redemption proceeds)................................................. None(2) 5.00%(3) 1.00%(4) None
Redemption Fees................................................................. None None None None
Exchange Fee.................................................................... None None None None
Annual Fund Operating Expenses (as a percentage of average net assets)
- --------------------------------------------------------------------------------
Management Fees................................................................. 0.75% 0.75% 0.75% 0.75%
12b-1 Fees (5) (6).............................................................. 0.25% 1.00% 1.00% None
Other Expenses.................................................................. 0.25% 0.25% 0.25% 0.25%
Total Fund Operating Expenses (7)............................................... 1.25% 2.00% 2.00% 1.00%
</TABLE>
- ------------
(1) Reduced for purchases of $25,000 and over (see "Purchase of Fund
Shares--Initial Sales Charge Alternative--Class A Shares").
(2) Investments that are not subject to any sales charge at the time of
purchase are subject to a CDSC of 1.00% that will be imposed on
redemptions made within one year after purchase, except for certain
specific circumstances (see "Purchase of Fund Shares--Initial Sales
Charge Alternative--Class A Shares").
(3) The CDSC is scaled down to 1.00% during the sixth year, reaching zero
thereafter.
(4) Only applicable to redemptions made within one year after purchase (see
"Purchase of Fund Shares--Level Load Alternative--Class C Shares").
(5) The 12b-1 fee is accrued daily and payable monthly. The entire 12b-1 fee
payable by Class A and a portion of the 12b-1 fee payable by each of
Class B and Class C equal to 0.25% of the average daily net assets of the
Class are currently each characterized as a service fee within the
meaning of National Association of Securities Dealers, Inc. ("NASD")
guidelines and are payments made for personal service and/or maintenance
of shareholder accounts. The remainder of the 12b-1 fee, if any, is an
asset-based sales charge, and is a distribution fee paid to the
Distributor to compensate it for the services provided and the expenses
borne by the Distributor and others in the distribution of the Fund's
shares (see "Purchase of Fund Shares--Plan of Distribution").
(6) Upon conversion of Class B shares to Class A shares, such shares will be
subject to the lower 12b-1 fee applicable to Class A shares. No sales
charge is imposed at the time of conversion of Class B shares to Class A
shares. Class C shares do not have a conversion feature and, therefore,
are subject to an ongoing 1.00% distribution fee (see "Purchase of Fund
Shares--Alternative Purchase Arrangements").
(7) There were no outstanding shares of Class A, Class C or Class D prior to
July 28, 1997. Accordingly, "Total Fund Operating Expenses," as shown
above with respect to those Classes, are estimates based upon the sum of
12b-1 Fees, Management Fees and estimated "Other Expenses."
4
<PAGE>
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
3 5 10
Examples 1 Year Years Years Years
- -------------------------------------------------- ------ ------ ------ ------
<S> <C> <C> <C> <C>
You would pay the following expenses on a $1,000
investment assuming (1) a 5% annual return and
(2) redemption at the end of each time period:
Class A....................................... $65 $90 $118 $196
Class B....................................... $70 $93 $128 $233
Class C....................................... $30 $63 $108 $233
Class D....................................... $10 $32 $55 $123
You would pay the following expenses on the same
$1,000 investment assuming no redemption at the
end of the period:
Class A....................................... $65 $90 $118 $196
Class B....................................... $20 $63 $108 $233
Class C....................................... $20 $63 $108 $233
Class D....................................... $10 $32 $55 $123
</TABLE>
THE ABOVE EXAMPLES SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR
FUTURE EXPENSES OR PERFORMANCE. ACTUAL EXPENSES OF EACH CLASS MAY BE GREATER OR
LESS THAN THOSE SHOWN.
The purpose of this table is to assist the investor in understanding the
various costs and expenses that an investor in the Fund will bear directly or
indirectly. For a more complete description of these costs and expenses, see
"The Fund and its Management," "Purchase of Fund Shares--Plan of Distribution"
and "Redemptions and Repurchases."
Long-term shareholders of Class B and Class C may pay more in sales charges,
including distribution fees, than the economic equivalent of the maximum
front-end sales charges permitted by the NASD.
5
<PAGE>
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
The following ratios and per share data for a share of beneficial interest
outstanding throughout each period have been audited by Price Waterhouse LLP,
independent accountants. The financial highlights should be read in conjunction
with the financial statements, notes thereto and the unqualified report of
independent accountants which are contained in the Statement of Additional
Information. Further information about the performance of the Fund is contained
in the Fund's Annual Report to Shareholders, which may be obtained without
charge upon request to the Fund.
<TABLE>
<CAPTION>
For the Year Ended For the period
November 30, October 27, 1995*
-------------------- through
CLASS B SHARES 1997**++ 1996 November 30, 1995
-------- -------- -----------------
<S> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period.... $12.99 $10.53 $10.00
-------- -------- --------
Net investment loss................... (0.24) (0.15) (0.01)
Net realized and unrealized gain...... 1.47 2.61 0.54
-------- -------- --------
Total from investment operations...... 1.23 2.46 0.53
-------- -------- --------
Net asset value, end of period........ $14.22 $12.99 $10.53
-------- -------- --------
-------- -------- --------
TOTAL INVESTMENT RETURN+................ 9.47% 23.36% 5.30%(1)
RATIOS TO AVERAGE NET ASSETS:
Expenses.............................. 2.00% 2.00% 2.87%(2)
Net investment loss................... (1.79)% (1.72)% (0.79)%(2)
SUPPLEMENTAL DATA:
Net assets, end of period, in
thousands............................ $365,484 $310,809 $102,009
Portfolio turnover rate............... 184% 108% 7%(1)
Average commission rate paid.......... $0.0570 $0.0570 --
</TABLE>
- -------------
* Commencement of operations.
** Prior to July 28, 1997, the Fund issued one class of shares. All shares of
the fund held prior to that date have been designated Class B shares.
++ 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.
6
<PAGE>
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
For the period
July 28, 1997*
through
November 30,
CLASS A SHARES 1997++
-----------------
<S> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period.................................. $ 14.34
-------
Net investment loss................................................... (0.06)
Net realized and unrealized loss...................................... (0.02)
-------
Total from investment operations...................................... (0.08)
-------
Net asset value, end of period........................................ $ 14.26
-------
-------
TOTAL INVESTMENT RETURN+.............................................. (0.56)%(1)
RATIOS TO AVERAGE NET ASSETS:
Expenses.............................................................. 1.27%(2)
Net investment loss................................................... (1.08)%(2)
SUPPLEMENTAL DATA:
Net assets, end of period, in thousands............................... $345
Portfolio turnover rate............................................... 184%(1)
Average commission rate paid.......................................... $0.0570
CLASS C SHARES
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period.................................. $ 14.34
-------
Net investment loss................................................... (0.09)
Net realized and unrealized loss...................................... (0.03)
-------
Total from investment operations...................................... (0.12)
-------
Net asset value, end of period........................................ $ 14.22
-------
-------
TOTAL INVESTMENT RETURN+.............................................. (0.84)%(1)
RATIOS TO AVERAGE NET ASSETS:
Expenses.............................................................. 2.03%(2)
Net investment loss................................................... (1.82)%(2)
SUPPLEMENTAL DATA:
Net assets, end of period, in thousands............................... $1,288
Portfolio turnover rate............................................... 184%(1)
Average commission rate paid.......................................... $0.0570
</TABLE>
- -------------
* The date shares were first issued.
++ 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.
7
<PAGE>
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
For the period
July 28, 1997*
through
November 30,
CLASS D SHARES 1997++
----------------
<S> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period.................................. $ 14.34
-------
Net investment loss................................................... (0.04)
Net realized and unrealized loss...................................... (0.03)
-------
Total from investment operations...................................... (0.07)
-------
Net asset value, end of period........................................ $ 14.27
-------
-------
TOTAL INVESTMENT RETURN+.............................................. (0.49)%(1)
RATIOS TO AVERAGE NET ASSETS:
Expenses.............................................................. 1.01%(2)
Net investment loss................................................... (0.82)%(2)
SUPPLEMENTAL DATA:
Net assets, end of period, in thousands............................... $136
Portfolio turnover rate............................................... 184%(1)
Average commission rate paid.......................................... $0.0570
</TABLE>
- -------------
* The date shares were first issued.
++ 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.
8
<PAGE>
THE FUND AND ITS MANAGEMENT
- --------------------------------------------------------------------------------
Dean Witter Capital Appreciation Fund (the "Fund") is an open-end,
diversified, management investment company. The Fund is a trust of the type
commonly known as a "Massachusetts business trust" and was organized under the
laws of The Commonwealth of Massachusetts on July 31, 1995.
Dean Witter InterCapital Inc. ("InterCapital" or the "Investment Manager"),
whose address is Two World Trade Center, New York, New York 10048, is the Fund's
Investment Manager. The Investment Manager, which was incorporated in July,
1992, is a wholly-owned subsidiary of Morgan Stanley, Dean Witter, Discover &
Co., a preeminent global financial services firm that maintains leading market
positions in each of its three primary businesses--securities, asset management
and credit services.
InterCapital and its wholly-owned subsidiary, Dean Witter Services Company
Inc., serve in various investment management, advisory, management and
administrative capacities to 103 investment companies, 29 of which are listed on
the New York Stock Exchange, with combined assets of approximately $98.9 billion
at December 31, 1997. The Investment Manager also manages portfolios of pension
plans, other institutions and individuals which aggregated approximately $4
billion at such date.
The Fund has retained the Investment Manager to provide administrative
services, manage its business affairs and manage the investment of the Fund's
assets, including the placing of orders for the purchase and sale of portfolio
securities. InterCapital has retained Dean Witter Services Company Inc. to
perform the aforementioned administrative services for the Fund.
The Fund's Trustees review the various services provided by or under the
direction of the Investment Manager to ensure that the Fund's general investment
policies and programs are being properly carried out and that administrative
services are being provided to the Fund in a satisfactory manner.
As full compensation for the services and facilities furnished to the Fund
and for expenses of the Fund assumed by the Investment Manager, the Fund pays
the Investment Manager monthly compensation calculated by applying the annual
rate of 0.75% to the Fund's net assets not exceeding $500 million and 0.725% to
the Fund's net assets exceeding $500 million. This fee is greater than that paid
by most other investment companies. For the fiscal year ended November 30, 1997,
the Fund accrued total compensation to the Investment Manager amounting to 0.75%
of the Fund's average net assets and the total expenses of Class B amounted to
2.00% of the average daily net assets of Class B. Shares of Class A, Class C and
Class D were first issued on July 28, 1997. The expenses of the Fund include:
the fee of the Investment Manager; the fee pursuant to the Plan of Distribution
(see "Purchase of Fund Shares"); taxes; transfer agent, custodian and auditing
fees; certain legal fees; and printing and other expenses relating to the Fund's
operations which are not expressly assumed by the Investment Manager under its
Investment Management Agreement with the Fund.
INVESTMENT OBJECTIVE AND POLICIES
- --------------------------------------------------------------------------------
The investment objective of the Fund is long-term capital appreciation. The
objective is a fundamental policy of the Fund and may not be changed without
shareholder approval. There is no assurance that the objective will be achieved.
The Fund seeks to achieve its investment objective by investing, under
normal circumstances, at least 65% of its total assets in the common stocks of
U.S. companies that, in the opinion of the Investment Manager, offer the
potential for either
9
<PAGE>
superior earnings growth and/or appear to be undervalued.
The Investment Manager will base the selection of stocks for the Fund's
portfolio on research and analysis, taking into account, among other factors, a
company's price/earnings ratio (that is whether the current stock price appears
undervalued in relation to earnings, projected cash flow, or asset value per
share; or the price-to-earnings ratio is attractive relative to the company's
underlying earnings growth rate), growth in sales, market-to-book ratio, the
quality of a company's balance sheet, sales-per-share and profitability in order
to determine whether the current market valuation is less than the Investment
Manager's view of a company's intrinsic value. Also, when reviewing investments
for selection, the Investment Manager will consider the following
characteristics of a company: capable management; attractive business niches;
pricing flexibility; sound financial and accounting practices and a demonstrated
ability or prospects to consistently grow revenues, earnings and cash flow.
Stocks may also be selected on the basis of whether the Investment Manager
believes that the potential exists for some catalyst (such as increased investor
attention, asset sales, a new product/innovation, or a change in management) to
cause the stock's price to rise. Such factors are part of the Investment
Manager's overall investment selection process.
The Investment Manager has no general criteria as to asset size, earnings or
industry type which would make an investment unsuitable for purchase by the
Fund. In addition, since the Investment Manager is seeking investments in
companies whose securities may appear to be undervalued, there is no limitation
on the stock price of any particular investment. However, as a result of the
selection process, which focuses on fundamentals in relation to prices, such
review of investments will include companies with low-priced stocks. In this
category are large companies with low-priced stocks (so called "fallen angels")
which, in the opinion of the Investment Manager, may appear to be undervalued
because they are overlooked by many investors; may not be closely followed
through investment research and/or their prices may reflect pessimism about the
companies' (and/or their industries') outlook. Such companies, by virtue of
their stock price, may be takeover candidates. Low-priced stocks are also
associated with smaller companies whose securities' value may reflect a discount
because of smaller size and lack of research coverage, emerging growth companies
and private companies undergoing their initial public offering. The Fund will
invest in companies of all sizes. For a discussion of the risks of investing in
the securities of such companies, see "Risk Considerations" below.
Consequently, the Fund looks for quality businesses with an investment
outlook based upon a mix of growth potential, financial strength and fundamental
value. The focus on price and fundamentals sets the Fund apart from pure
"growth" or pure "value" funds. The Fund's holdings will be widely diversified
by industry and company and under most circumstances, at the time of initial
purchase, the average position will be less than 1.5% of the Fund's net assets.
In addition to U.S. common stock, up to 35% of the Fund's total assets may
be invested in debt or preferred equity securities convertible into or
exchangeable for equity securities, rights and warrants, when considered by the
Investment Manager to be consistent with the Fund's investment objective. (For a
discussion of the risks of investing in each of these securities, see "Risk
Considerations" below.)
The Fund may also invest in other debt securities without regard to quality
or rating, if in the opinion of the Investment Manager such securities meet the
investment criteria of the Fund. The Fund will not purchase a non-investment
grade debt security (or junk bond) if, immediately after such purchase, the Fund
would have more than 5% of its total assets invested in such securities.
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The Fund may invest up to 10% of its assets in foreign securities, including
non-dollar denominated securities traded outside of the U.S. and U.S.
dollar-denominated securities such as ADRs. (For a discussion of the risks of
investing in foreign securities, see "Risk Considerations" below.)
There may be periods during which, in the opinion of the Investment Manager,
market conditions warrant a reduction of some or all of the Fund's securities
holdings. During such periods, the Fund may adopt a temporary "defensive"
posture in which greater than 35% of its total assets are invested in money
market instruments or cash, including obligations issued or guaranteed as to
principal or interest by the United States Government, its agencies or
instrumentalities, certificates of deposit, bankers' acceptances and other
obligations of domestic banks having total assets of $1 billion or more, and
short-term commercial paper of corporations organized under the laws of any
state or political subdivision of the United States.
The securities in which the Fund invests may or may not be listed on a
national stock exchange, but if they are not so listed, will generally have an
established over-the-counter market.
RISK CONSIDERATIONS
Given the investment risks described below, an investment in shares of the
Fund should not be considered a complete investment program and is not
appropriate for all investors. Investors should carefully consider their ability
to assume these risks before making an investment in the Fund.
The net asset value of the Fund's shares will fluctuate with changes in the
market value of its portfolio securities. The market value of the Fund's
portfolio securities will increase or decrease due to a variety of economic,
market or political factors which cannot be predicted. The Fund is intended for
long-term investors who can accept the risks involved in seeking long-term
capital appreciation through the investment primarily in the securities of
companies that offer the potential for either superior earnings growth and/or
appear to be undervalued. In selecting investments for the Fund, the Investment
Manager has no general criteria as to a company's asset size, earnings or
industry type. It should be recognized that investing in such companies involves
greater risk than is customarily associated with investing in more established
companies.
The Fund may invest in securities of companies that are not well known to
the investing public or followed by many securities analysts, with the result
that there may be less publicly available information concerning such
securities. Also, these securities may be more volatile in price and have lower
trading volumes. In addition, while companies in which the Fund may invest often
have sales and earnings growth rates which may exceed those of large companies
and may be reflected in more rapid share price appreciation, such companies may
have limited operating histories, product lines, markets or financial resources
and they may be dependent upon one-person management. These companies may be
subject to intense competition from larger companies. The securities of such
companies may have limited marketability and may be subject to more abrupt or
erratic movements in price than securities of larger companies or in the market
averages in general. In the case of securities of large companies with
lower-priced stock (the so-called "fallen angels"), the risk associated with
such investment is that the price may continue to fall.
Rights and Warrants. The Fund may acquire rights and/or warrants which are
attached to other securities in its portfolio, or which are issued as a
distribution by the issuer of a security held in its portfolio. Rights and/or
warrants are, in effect, options to purchase equity securities at a specific
price, generally valid for a specific period of time, and have no voting rights,
pay no dividends and have no rights with respect to the corporation issuing
them.
Convertible Securities. The Fund may acquire, through purchase or a
distribution by the issuer of a security held in its portfolio, a fixed-income
security which is convertible into common
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stock of the issuer. Convertible securities rank senior to common stocks in a
corporation's capital structure and, therefore, entail less risk than the
corporation's common stock. The value of a convertible security is a function of
its "investment value" (its value as if it did not have a conversion privilege),
and its "conversion value" (the security's worth if it were to be exchanged for
the underlying security, at market value, pursuant to its conversion privilege).
To the extent that a convertible security's investment value is greater than
its conversion value, its price will be primarily a reflection of such
investment value and its price will be likely to increase when interest rates
fall and decrease when interest rates rise, as with a fixed-income security (the
credit standing of the issuer and other factors may also have an effect on the
convertible security's value). If the conversion value exceeds the investment
value, the price of the convertible security will rise above its investment
value and, in addition, will sell at some premium over its conversion value.
(This premium represents the price investors are willing to pay for the
privilege of purchasing a fixed-income security with a possibility of capital
appreciation due to the conversion privilege.) At such times the price of the
convertible security will tend to fluctuate directly with the price of the
underlying equity security. A portion of the convertible securities in which the
Fund may invest may be unrated or, if rated, rated below investment grade by a
nationally recognized statistical rating organization.
Foreign Securities. The Fund may invest up to 10% of its total assets in
foreign securities. Foreign securities investments may be affected by changes in
currency rates or exchange control regulations, changes in governmental
administration or economic or monetary policy (in the United States and abroad)
or changed circumstances in dealings between nations. Fluctuations in the
relative rates of exchange between the currencies of different nations will
affect the value of the Fund's investments denominated in foreign currency.
Changes in foreign currency exchange rates relative to the U.S. dollar will
affect the U.S. dollar value of the Fund's assets denominated in that currency
and thereby impact upon the Fund's total return on such assets.
Foreign currency exchange rates are determined by forces of supply and
demand on the foreign exchange markets. These forces are themselves affected by
the international balance of payments and other economic and financial
conditions, government intervention, speculation and other factors. Moreover,
foreign currency exchange rates may be affected by the regulatory control of the
exchanges on which the currencies trade. The foreign currency transactions of
the Fund will be conducted on a spot basis or through forward foreign currency
exchange contracts (described below). The Fund will incur certain costs in
connection with these currency transactions.
Investments in foreign securities will also occasion risks relating to
political and economic developments abroad, including the possibility of
expropriations or confiscatory taxation, limitations on the use or transfer of
Fund assets and any effects of foreign social, economic or political
instability. Foreign companies are not subject to the regulatory requirements of
U.S. companies and, as such, there may be less publicly available information
about such companies. Moreover, foreign companies are not subject to uniform
accounting, auditing and financial reporting standards and requirements
comparable to those applicable to U.S. companies.
Securities of foreign issuers may be less liquid than comparable securities
of U.S. issuers and, as such, their price changes may be more volatile.
Furthermore, foreign exchanges and broker-dealers are generally subject to less
government and exchange scrutiny and regulation than their American
counterparts. Brokerage commissions, dealer concessions and other transaction
costs may be higher on foreign markets than in the U.S. In addition, differences
in clearance and settlement procedures on foreign markets may occasion delays in
settlements of the Fund's trades effected in such markets. As such, the
inability to dispose of portfolio securities due to settlement delays could
result in
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losses to the Fund due to subsequent declines in value of such securities and
the inability of the Fund to make intended security purchases due to settlement
problems could result in a failure of the Fund to make potentially advantageous
investments.
Repurchase Agreements. The Fund may enter into repurchase agreements, which
may be viewed as a type of secured lending by the Fund, and which 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 at a specified price and at
a fixed time in the future, usually not more than seven days from the date of
purchase. While repurchase agreements involve certain risks not associated with
direct investments in debt securities, including the risks of default or
bankruptcy of the selling financial institution, the Fund follows procedures to
minimize such risks. These procedures include effecting repurchase transactions
only with large, well-capitalized and well-established financial institutions
and maintaining adequate collateralization.
When-Issued and Delayed Delivery Securities and Forward Commitments. From
time to time, in the ordinary course of business, 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 such transactions are negotiated,
the price is fixed at the time of the commitment, but delivery and payment can
take place a month or more after the date of the commitment. There is no overall
limit on the percentage of the Fund's assets which may be committed to the
purchase of securities on a when-issued, delayed delivery or forward commitment
basis. An increase in the percentage of the Fund's assets committed to the
purchase of securities on a when-issued, delayed delivery or forward commitment
basis may increase the volatility of the Fund's net asset value. An increase in
the percentage of the Fund's assets committed to the purchase of securities on a
when-issued or delayed delivery basis may increase the volatility of the Fund's
net asset value.
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, leveraged buyout or debt restructuring. If the
anticipated event does not occur and the securities are not issued, the Fund
will have lost an investment opportunity. There is no overall limit on the
percentage of the Fund's assets which may be committed to the purchase of
securities on a "when, as and if issued" basis. An increase in the percentage of
the Fund's assets committed to the purchase of securities on a "when, as and if
issued" basis may increase the volatility of its net asset value.
Investment in Real Estate Investment Trusts. The Fund may invest in real
estate investment trusts, which pool investors' funds for investments primarily
in commercial real estate properties. Investment in real estate investment
trusts may be the most practical available means for the Fund to invest in the
real estate industry (the Fund is prohibited from investing in real estate
directly). As a shareholder in a real estate investment trust, the Fund would
bear its ratable share of the real estate investment trust's expenses, including
its advisory and administration fees. At the same time the Fund would continue
to pay its own investment management fees and other expenses, as a result of
which the Fund and its shareholders in effect will be absorbing duplicate levels
of fees with respect to investments in real estate investment trusts.
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, implicitly,
automatically compounded and paid out at maturity. While such compounding at a
constant
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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.
Private Placements. The Fund may invest up to 5% of its total assets in
securities which are subject to restrictions on resale because they have not
been registered under the Securities Act of 1933, as amended (the "Securities
Act"), or which are otherwise not readily marketable. (Securities eligible for
resale pursuant to Rule 144A under the Securities Act, and determined to be
liquid pursuant to the procedures discussed in the following paragraph, are not
subject to the foregoing restriction.) These securities are generally referred
to as private placements or restricted securities. Limitations on the resale of
such securities may have an adverse effect on their marketability, and may
prevent the Fund from disposing of them promptly at reasonable prices. The Fund
may have to bear the expense of registering such securities for resale and the
risk of substantial delays in effecting such registration.
The Securities and Exchange Commission has adopted Rule 144A under the
Securities Act, which permits the Fund to sell restricted securities to
qualified institutional buyers without limitation. The Investment Manager,
pursuant to procedures adopted by the Trustees of the Fund, 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," such security will
not be included within the category "illiquid securities," which under current
policy may not exceed 10% 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.
Options and Futures Transactions. The Fund may purchase and sell (write)
call and put options on portfolio securities which are denominated in either
U.S. dollars or foreign currencies and on the U.S. dollar and foreign
currencies, which are or may in the future be listed on several U.S. and foreign
securities exchanges or are written in over-the-counter transactions ("OTC
options"). OTC options are purchased from or sold (written) to dealers or
financial institutions which have entered into direct agreements with the Fund.
The Fund is permitted to write covered call options on portfolio securities
and the U.S. dollar and foreign currencies, without limit, in order to hedge
against the decline in the value of a security or currency in which such
security is denominated and to close out long call option positions. The Fund
may write covered put options, under which the Fund incurs an obligation to buy
the security (or currency) underlying the option from the purchaser of the put
at the option's exercise price at any time during the option period, at the
purchaser's election.
The Fund may purchase listed and OTC call and put options in amounts
equalling up to 5% of its total assets. The Fund may purchase call options to
close out a covered call position or to protect against an increase in the price
of a security it anticipates purchasing or, in the case of call options on a
foreign currency, to hedge against an adverse exchange rate change of the
currency in which the
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security it anticipates purchasing is denominated vis-a-vis the currency in
which the exercise price is denominated. The Fund may purchase put options on
securities which it holds in its portfolio to protect itself against a decline
in the value of the security and to close out written put positions in a manner
similar to call option closing purchase transactions. There are no other limits
on the Fund's ability to purchase call and put options.
The Fund may purchase and sell futures contracts that are currently traded,
or may in the future be traded, on U.S. and foreign commodity exchanges on
underlying portfolio securities, on any currency ("currency" futures), on U.S.
and foreign fixed-income securities ("interest rate" futures) and on such
indexes of U.S. or foreign equity or fixed-income securities as may exist or
come into being ("index" futures). The Fund may purchase or sell interest rate
futures contracts for the purpose of hedging some or all of the value of its
portfolio securities (or anticipated portfolio securities) against changes in
prevailing interest rates. The Fund may purchase or sell index futures contracts
for the purpose of hedging some or all of its portfolio (or anticipated
portfolio) securities against changes in their prices (or the currency in which
they are denominated). As a futures contract purchaser, the Fund incurs an
obligation to take delivery of a specified amount of the obligation underlying
the contract at a specified time in the future for a specified price. As a
seller of a futures contract, the Fund incurs an obligation to deliver the
specified amount of the underlying obligation at a specified time in return for
an agreed upon price.
The Fund also may purchase and write call and put options on futures
contracts which are traded on an exchange and enter into closing transactions
with respect to such options to terminate an existing position.
New futures contracts, options and other financial products and various
combinations thereof continue to be developed. The Fund may invest in any such
futures, options or products as may be developed, to the extent consistent with
its investment objective and applicable regulatory requirements.
The Fund may close out its position as writer of an option, or as a buyer or
seller of a futures contract, only if a liquid secondary market exists for
options or futures contracts of that series. There is no assurance that such a
market will exist, particularly in the case of OTC options, as such options may
generally only be closed out by entering into a closing purchase transaction
with the purchasing dealer. Also, exchanges may limit the amount by which the
price of many futures contracts may move on any day. If the price moves equal to
the daily limit on successive days, then it may prove impossible to liquidate a
futures position until the daily limit moves have ceased.
While the futures contracts and options transactions to be engaged in by the
Fund for the purpose of hedging the Fund's portfolio securities are not
speculative in nature, there are risks inherent in the use of such instruments.
One such risk is that the Investment Manager or Sub-Adviser could be incorrect
in its expectations as to the direction or extent of various interest rate or
price movements or the time span within which the movements take place. For
example, if the Fund sold futures contracts for the sale of securities in
anticipation of an increase in interest rates, and then interest rates went down
instead, causing bond prices to rise, the Fund would lose money on the sale.
Another risk which will arise in employing futures contracts to protect against
the price volatility of portfolio securities is that the prices of securities,
currencies and indexes subject to futures contracts (and thereby the futures
contract prices) may correlate imperfectly with the behavior of the U.S. dollar
cash prices of the Fund's portfolio securities and their denominated currencies.
See the Statement of Additional Information for a further discussion of risks.
Investment in Other Investment Vehicles. Under the Investment Company Act of
1940, as amended, the Fund generally may invest up to 10%
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of its total assets in the aggregate in shares of other investment companies and
up to 5% of its total assets in any one investment company. The Fund may not own
more than 3% of the outstanding voting stock of any investment company.
Investment in foreign investment companies may be the sole or most practical
means by which the Fund may participate in certain foreign securities markets,
and investment in real estate investment trusts may be the most practical
available means for the Fund to invest in the real estate industry (the Fund is
prohibited from investing in real estate directly). As a shareholder in an
investment company or real estate investment trust, the Fund would bear its
ratable share of that entity's expenses, including its advisory and
administration fees. At the same time the Fund would continue to pay its own
investment management fees and other expenses, as a result of which the Fund and
its shareholders in effect will be absorbing duplicate levels of fees with
respect to investments in other investment companies and in real estate
investment trusts.
Lending of Portfolio Securities. Consistent with applicable regulatory
requirements, the Fund may lend its portfolio securities to brokers, dealers and
other financial institutions, provided that such loans are callable at any time
by the Fund (subject to certain notice provisions described in the Statement of
Additional Information), and are at all times secured by cash or money market
instruments, which are maintained in a segregated account pursuant to applicable
regulations and that are equal to at least the market value, determined daily,
of the loaned securities. As with any extensions of credit, there are risks of
delay in recovery and in some cases even loss of rights in the collateral should
the borrower of the securities fail financially. However, loans of portfolio
securities will only be made to firms deemed by the Investment Manager to be
creditworthy and when the income which can be earned from such loans justifies
the attendant risks.
Year 2000. The investment management services provided to the Fund by the
Investment Manager and the services provided to shareholders by the Distributor
and the Transfer Agent depend on the smooth functioning of their computer
systems. Many computer software systems in use today cannot recognize the year
2000, but revert to 1900 or some other date, due to the manner in which dates
were encoded and calculated. That failure could have a negative impact on the
handling of securities trades, pricing and account services. The Investment
Manager, the Distributor and the Transfer Agent have been actively working on
necessary changes to their own computer systems to prepare for the year 2000 and
expect that their systems will be adapted before that date, but there can be no
assurance that they will be successful, or that interaction with other
non-complying computer systems will not impair their services at that time.
For additional risk disclosure, please refer to the "Investment Objective
and Policies" section of the Prospectus and to the "Investment Practices and
Policies" section of the Statement of Additional Information.
PORTFOLIO MANAGEMENT
The Fund's portfolio is actively managed by its Investment Manager with a
view to achieving the Fund's investment objective. In determining which
securities to purchase for the Fund or hold in the Fund's portfolio, the
Investment Manager will rely on information from various sources, including
research, analysis and appraisals of brokers and dealers, including Dean Witter
Reynolds Inc. ("DWR"), Morgan Stanley & Co. Incorporated and other broker-dealer
affiliates of InterCapital, the view of others regarding economic developments
and interest rate trends, and the Investment Manager's own analysis of factors
they deem relevant. The Fund's portfolio is managed within InterCapital's Growth
Group, which manages 33 funds and fund portfolios, with approximately $14.5
billion in assets as of December 31, 1997. Ronald J. Worobel, Senior Vice
President of InterCapital and a member of InterCapital's Growth Group, is the
primary portfolio manager of the Fund and has been a portfolio manager at
InterCapital for over five years.
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Personnel of the Investment Manager have substantial experience in the use
of the investment techniques described above under the heading "Options and
Futures Transactions," which techniques require skills different from those
needed to select the portfolio securities underlying various options and futures
contracts.
Orders for transactions in portfolio securities and commodities may be
placed for the Fund with a number of brokers and dealers, including DWR, Morgan
Stanley & Co. Incorporated and other brokers and dealers that are affiliates of
InterCapital. The Fund may incur brokerage commissions on transactions conducted
through such affiliates. Pursuant to an order of the Securities and Exchange
Commission, the Fund may effect principal transactions in certain money market
instruments with DWR, a broker-dealer affiliate of the Investment Manager.
Although the Fund does not intend to engage in short-term trading, it may
sell portfolio securities without regard to the length of time they have been
held when such sale will, in the opinion of the Investment Manager, contribute
to the Fund's investment objective. It is not anticipated that the Fund's
portfolio turnover rate will exceed 300% in any one year.
The Fund will incur brokerage costs commensurate with its portfolio turnover
rate. Short term gains and losses may result from such portfolio transactions.
See "Dividends, Distributions and Taxes" for a discussion of the tax
implications of the Fund's trading policy. A more extensive discussion of the
Fund's portfolio brokerage policies is set forth in the Statement of Additional
Information.
INVESTMENT RESTRICTIONS
- --------------------------------------------------------------------------------
The investment restrictions listed below are among the restrictions which
have been adopted by the Fund as fundamental policies. Under the Investment
Company Act of 1940, as amended (the "Act"), a fundamental policy may not be
changed without the vote of a majority of the outstanding voting securities of
the Fund, as defined in the Act. For purposes of the following limitations: (i)
all percentage limitations apply immediately after a purchase or initial
investment, and (ii) any subsequent change in any applicable percentage
resulting from market fluctuations or other changes in total or net assets does
not require elimination of any security from the portfolio.
The Fund may not:
1. 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).
2. 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, its agencies or
instrumentalities.
3. Invest more than 5% of the value of its total assets in securities of
issuers having a record, together with predecessors, of less than three years of
continuous operation. This restriction shall not apply to any obligation issued
or guaranteed by the United States Government, its agencies or
instrumentalities.
4. The Fund may not, as to 75% of its total assets, purchase more than 10% of
the voting securities of any issuer.
Notwithstanding any other investment policy or restriction, 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.
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PURCHASE OF FUND SHARES
- --------------------------------------------------------------------------------
GENERAL
The Fund offers each class of its shares for sale to the public on a
continuous basis. Pursuant to a Distribution Agreement between the Fund and Dean
Witter Distributors Inc. (the "Distributor"), an affiliate of the Investment
Manager, shares of the Fund are distributed by the Distributor and offered by
DWR and other dealers who have entered into selected dealer agreements with the
Distributor ("Selected Broker-Dealers"). The principal executive office of the
Distributor is located at Two World Trade Center, New York, New York 10048.
The Fund offers four classes of shares (each, a "Class"). Class A shares are
sold to investors with an initial sales charge that declines to zero for larger
purchases; however, Class A shares sold without an initial sales charge are
subject to a contingent deferred sales charge ("CDSC") of 1.0% if redeemed
within one year of purchase, except for certain specific circumstances. Class B
shares are sold without an initial sales charge but are subject to a CDSC
(scaled down from 5.0% to 1.0%) payable upon most redemptions within six years
after purchase. (Class B shares purchased by certain qualified plans are subject
to a CDSC scaled down from 2.0% to 1.0% if redeemed within three years after
purchase.) Class C shares are sold without an initial sales charge but are
subject to a CDSC of 1.0% on most redemptions made within one year after
purchase. Class D shares are sold without an initial sales charge or CDSC and
are available only to investors meeting an initial investment minimum of $5
million, ($25 million for certain qualified plans), and to certain other limited
categories of investors. At the discretion of the Board of Trustees of the Fund,
Class A shares may be sold to categories of investors in addition to those set
forth in this prospectus at net asset value without a front-end sales charge,
and Class D shares may be sold to certain other categories of investors, in each
case as may be described in the then current prospectus of the Fund. See
"Alternative Purchase Arrangements-- Selecting a Particular Class" for a
discussion of factors to consider in selecting which Class of shares to
purchase.
The minimum initial purchase is $1,000 for each Class of shares, although
Class D shares are only available to persons investing $5 million ($25 million
for certain qualified plans) or more and to certain other limited categories of
investors. For the purpose of meeting the minimum $5 million (or $25 million)
initial investment for Class D shares, and subject to the $1,000 minimum initial
investment for each Class of the Fund, an investor's existing holdings of Class
A shares of the Fund and other Dean Witter Funds that are multiple class funds
("Dean Witter Multi-Class Funds") and shares of Dean Witter Funds sold with a
front-end sales charge ("FSC Funds") and concurrent investments in Class D
shares of the Fund and other Dean Witter Multi-Class Funds will be aggregated.
Subsequent purchases of $100 or more may be made by sending a check, payable to
Dean Witter Capital Appreciation Fund, directly to Dean Witter Trust FSB (the
"Transfer Agent" or "DWT") at P.O. Box 1040, Jersey City, NJ 07303 or by
contacting an account executive of DWR or other Selected Broker-Dealer. When
purchasing shares of the Fund, investors must specify whether the purchase is
for Class A, Class B, Class C or Class D shares. If no Class is specified, the
Transfer Agent will not process the transaction until the proper Class is
identified.
The minimum initial purchase in the case of investments through
EasyInvest-SM-, an automatic purchase plan (see "Shareholder Services"), is
$100, provided that the schedule of automatic investments will result in
investments totalling at least $1,000 within the first twelve months. The
minimum initial purchase in the case of an "Education IRA" is $500, if the
Distributor has reason to believe that additional investments will increase the
investment in the account to $1,000 within three years. In the case of purchases
pursuant to (i) Systematic
18
<PAGE>
Payroll Deduction Plans (including Individual Retirement Plans), (ii) the
InterCapital mutual fund asset allocation program and (iii) fee-based programs
approved by the Distributor, pursuant to which participants pay an asset based
fee for services in the nature of investment advisory or administrative
services, the Fund, in its discretion, may accept such purchases without regard
to any minimum amounts which would otherwise be required, provided in the case
of Systematic Payroll Deduction Plans that the Distributor has reason to believe
that additional investments will increase the amount of the purchase of shares
in all accounts under such Plans to at least $1,000. Certificates for shares
purchased will not be issued unless a request is made by the shareholder in
writing to the Transfer Agent.
Shares of the Fund are sold through the Distributor on a normal three
business day settlement basis; that is, payment is due on the third business day
(settlement date) after the order is placed with the Distributor. Since DWR and
other Selected Broker-Dealers forward investors' funds on settlement date, they
will benefit from the temporary use of the funds if payment is made prior
thereto. As noted above, orders placed directly with the Transfer Agent must be
accompanied by payment. Investors will be entitled to receive income dividends
and capital gains distributions if their order is received by the close of
business on the day prior to the record date for such dividends and
distributions. Sales personnel of a Selected Broker-Dealer are compensated for
selling shares of the Fund at the time of their sale by the Distributor or any
of its affiliates and/or the Selected Broker-Dealer. In addition, some sales
personnel of the Selected Broker-Dealer will receive various types of non-cash
compensation as special sales incentives, including trips, educational and/or
business seminars and merchandise. The Fund and the Distributor reserve the
right to reject any purchase orders.
ALTERNATIVE PURCHASE ARRANGEMENTS
The Fund offers several Classes of shares to investors designed to provide
them with the flexibility of selecting an investment best suited to their needs.
The general public is offered three Classes of shares: Class A shares, Class B
shares and Class C shares, which differ principally in terms of sales charges
and rate of expenses to which they are subject. A fourth Class of shares, Class
D shares, is offered only to limited categories of investors (see "No Load
Alternative--Class D Shares" below).
Each Class A, Class B, Class C or Class D share of the Fund represents an
identical interest in the investment portfolio of the Fund except that Class A,
Class B and Class C shares bear the expenses of the ongoing shareholder service
fees, Class B and Class C shares bear the expenses of the ongoing distribution
fees and Class A, Class B and Class C shares which are redeemed subject to a
CDSC bear the expense of the additional incremental distribution costs resulting
from the CDSC applicable to shares of those Classes. The ongoing distribution
fees that are imposed on Class A, Class B and Class C shares will be imposed
directly against those Classes and not against all assets of the Fund and,
accordingly, such charges against one Class will not affect the net asset value
of any other Class or have any impact on investors choosing another sales charge
option. See "Plan of Distribution" and "Redemptions and Repurchases."
Set forth below is a summary of the differences between the Classes and the
factors an investor should consider when selecting a particular Class. This
summary is qualified in its entirety by detailed discussion of each Class that
follows this summary.
Class A Shares. Class A shares are sold at net asset value plus an initial
sales charge of up to 5.25%. The initial sales charge is reduced for certain
purchases. Investments of $1 million or more (and investments by certain other
limited categories of investors) are not subject to any sales charges at the
time of purchase but are subject to a CDSC of 1.0% on redemptions made within
one year after purchase, except for certain specific circumstances. Class A
shares are also subject to a 12b-1 fee of up to 0.25% of the average daily net
assets of the Class.
19
<PAGE>
See "Initial Sales Charge Alternative--Class A Shares."
Class B Shares. Class B shares are offered at net asset value with no
initial sales charge but are subject to a CDSC (scaled down from 5.0% to 1.0%)
if redeemed within six years of purchase. (Class B shares purchased by certain
qualified plans are subject to a CDSC scaled down from 2.0% to 1.0% if redeemed
within three years after purchase.) This CDSC may be waived for certain
redemptions. Class B shares are also subject to an annual 12b-1 fee of 1.0% of
the lesser of: (a) the average daily aggregate gross sales of the Fund's Class B
shares since the inception of the Fund (not including reinvestments of dividends
or capital gains distributions), less the average daily aggregate net asset
value of the Fund's Class B shares redeemed since the Fund's inception upon
which a CDSC has been imposed or waived, or (b) the average daily net assets of
Class B. The Class B shares' distribution fee will cause that Class to have
higher expenses and pay lower dividends than Class A or Class D shares.
After approximately ten (10) years, Class B shares will convert
automatically to Class A shares of the Fund, based on the relative net asset
values of the shares of the two Classes on the conversion date. In addition, a
certain portion of Class B shares that have been acquired through the
reinvestment of dividends and distributions will be converted at that time. See
"Contingent Deferred Sales Charge Alternative--Class B Shares."
Class C Shares. Class C shares are sold at net asset value with no initial
sales charge but are subject to a CDSC of 1.0% on redemptions made within one
year after purchase. This CDSC may be waived for certain redemptions. They are
subject to an annual 12b-1 fee of up to 1.0% of the average daily net assets of
the Class C shares. The Class C shares' distribution fee may cause that Class to
have higher expenses and pay lower dividends than Class A or Class D shares. See
"Level Load Alternative--Class C Shares."
Class D Shares. Class D shares are available only to limited categories of
investors (see "No Load Alternative--Class D Shares" below). Class D shares are
sold at net asset value with no initial sales charge or CDSC. They are not
subject to any 12b-1 fees. See "No Load Alternative--Class D Shares."
Selecting a Particular Class. In deciding which Class of Fund shares to
purchase, investors should consider the following factors, as well as any other
relevant facts and circumstances:
The decision as to which Class of shares is more beneficial to an investor
depends on the amount and intended length of his or her investment. Investors
who prefer an initial sales charge alternative may elect to purchase Class A
shares. Investors qualifying for significantly reduced or, in the case of
purchases of $1 million or more, no initial sales charges may find Class A
shares particularly attractive because similar sales charge reductions are not
available with respect to Class B or Class C shares. Moreover, Class A shares
are subject to lower ongoing expenses than are Class B or Class C shares over
the term of the investment. As an alternative, Class B and Class C shares are
sold without any initial sales charge so the entire purchase price is
immediately invested in the Fund. Any investment return on these additional
investment amounts may partially or wholly offset the higher annual expenses of
these Classes. Because the Fund's future return cannot be predicted, however,
there can be no assurance that this would be the case.
Finally, investors should consider the effect of the CDSC period and any
conversion rights of the Classes in the context of their own investment time
frame. For example, although Class C shares are subject to a significantly lower
CDSC upon redemptions, they do not, unlike Class B shares, convert into Class A
shares after approximately ten years, and, therefore, are subject to an ongoing
12b-1 fee of 1.0% (rather than the 0.25% fee applicable to Class A shares) for
an indefinite period of time. Thus, Class B shares may be more attractive than
20
<PAGE>
Class C shares to investors with longer term investment outlooks. Other
investors, however, may elect to purchase Class C shares if, for example, they
determine that they do not wish to be subject to a front-end sales charge and
they are uncertain as to the length of time they intend to hold their shares.
For the purpose of meeting the $5 million (or $25 million) minimum
investment amount for Class D shares, holdings of Class A shares in all Dean
Witter Multi-Class Funds, shares of FSC Funds and shares of Dean Witter Funds
for which such shares have been exchanged will be included together with the
current investment amount.
Sales personnel may receive different compensation for selling each Class of
shares. Investors should understand that the purpose of a CDSC is the same as
that of the initial sales charge in that the sales charges applicable to each
Class provide for the financing of the distribution of shares of that Class.
Set forth below is a chart comparing the sales charge, 12b-1 fees and
conversion options applicable to each Class of shares:
<TABLE>
<CAPTION>
- -----------------------------------------------------------
CONVERSION
CLASS SALES CHARGE 12b-1 FEE FEATURE
<C> <S> <C> <C>
- -----------------------------------------------------------
A Maximum 5.25% 0.25% No
initial sales
charge reduced for
purchases of
$25,000 and over;
shares sold
without an initial
sales charge
generally subject
to a 1.0% CDSC
during first year.
- -----------------------------------------------------------
B Maximum 5.0% CDSC 1.0% B shares convert
during the first to A shares
year decreasing to automatically
0 after six years after
approximately
ten years
- -----------------------------------------------------------
C 1.0% CDSC during 1.0% No
first year
- -----------------------------------------------------------
D None None No
</TABLE>
See "Purchase of Fund Shares" and "The Fund and its Management" for a
complete description of the sales charges and service and distribution fees for
each Class of shares and "Determination of Net Asset Value," "Dividends,
Distributions and Taxes" and "Shareholder Services--Exchange Privilege" for
other differences between the Classes of shares.
INITIAL SALES CHARGE ALTERNATIVE--
CLASS A SHARES
Class A shares are sold at net asset value plus an initial sales charge. In
some cases, reduced sales charges may be available, as described below.
Investments of $1 million or more (and investments by certain other limited
categories of investors) are not subject to any sales charges at the time of
purchase but are subject to a CDSC of 1.0% on redemptions made within one year
after purchase (calculated from the last day of the month in which the shares
were purchased), except for certain specific circumstances. The CDSC will be
assessed on an amount equal to the lesser of the current market value or the
cost of the shares being redeemed. The CDSC will not be imposed (i) in the
circumstances set forth below in the section "Contingent Deferred Sales Charge
Alternative--Class B Shares--CDSC Waivers," except that the references to six
years in the first paragraph of that section shall mean one year in the case of
Class A shares, and (ii) in the circumstances identified in the section
"Additional Net Asset Value Purchase Options" below. Class A shares are also
subject to an annual 12b-1 fee of up to 0.25% of the average daily net assets of
the Class.
The offering price of Class A shares will be the net asset value per share
next determined following receipt of an order (see "Determination of Net Asset
Value" below), plus a sales charge (expressed as a percentage of the offering
price) on a single transaction as shown in the following table:
21
<PAGE>
<TABLE>
<CAPTION>
SALES CHARGE
------------------------------------------
PERCENTAGE OF APPROXIMATE
AMOUNT OF PUBLIC OFFERING PERCENTAGE OF AMOUNT
SINGLE TRANSACTION PRICE INVESTED
- ------------------------- ------------------- ---------------------
<S> <C> <C>
Less than $25,000........ 5.25% 5.54%
$25,000 but less
than $50,000........ 4.75% 4.99%
$50,000 but less
than $100,000....... 4.00% 4.17%
$100,000 but less
than $250,000....... 3.00% 3.09%
$250,000 but less
than $1 million..... 2.00% 2.04%
$1 million and over...... 0 0
</TABLE>
Upon notice to all Selected Broker-Dealers, the Distributor may reallow up
to the full applicable sales charge as shown in the above schedule during
periods specified in such notice. During periods when 90% or more of the sales
charge is reallowed, such Selected Broker-Dealers may be deemed to be
underwriters as that term is defined in the Securities Act of 1933.
The above schedule of sales charges is applicable to purchases in a single
transaction by, among others: (a) an individual; (b) an individual, his or her
spouse and their children under the age of 21 purchasing shares for his, her or
their own accounts; (c) a trustee or other fiduciary purchasing shares for a
single trust estate or a single fiduciary account; (d) a pension, profit-sharing
or other employee benefit plan qualified or non-qualified under Section 401 of
the Internal Revenue Code; (e) tax-exempt organizations enumerated in Section
501(c)(3) or (13) of the Internal Revenue Code; (f) employee benefit plans
qualified under Section 401 of the Internal Revenue Code of a single employer or
of employers who are "affiliated persons" of each other within the meaning of
Section 2(a)(3)(c) of the Act; and for investments in Individual Retirement
Accounts of employees of a single employer through Systematic Payroll Deduction
plans; or (g) any other organized group of persons, whether incorporated or not,
provided the organization has been in existence for at least six months and has
some purpose other than the purchase of redeemable securities of a registered
investment company at a discount.
Combined Purchase Privilege. Investors may have the benefit of reduced
sales charges in accordance with the above schedule by combining purchases of
Class A shares of the Fund in single transactions with the purchase of Class A
shares of other Dean Witter Multi-Class Funds and shares of FSC Funds. The sales
charge payable on the purchase of the Class A shares of the Fund, the Class A
shares of the other Dean Witter Multi-Class Funds and the shares of the FSC
Funds will be at their respective rates applicable to the total amount of the
combined concurrent purchases of such shares.
Right of Accumulation. The above persons and entities may benefit from a
reduction of the sales charges in accordance with the above schedule if the
cumulative net asset value of Class A shares purchased in a single transaction,
together with shares of the Fund and other Dean Witter Funds previously
purchased at a price including a front-end sales charge (including shares of the
Fund and other Dean Witter Funds acquired in exchange for those shares, and
including in each case shares acquired through reinvestment of dividends and
distributions), which are held at the time of such transaction, amounts to
$25,000 or more. If such investor has a cumulative net asset value of shares of
FSC Funds and Class A and Class D shares that together with the current
investment amount, is equal to at least $5 million ($25 million for certain
qualified plans), such investor is eligible to purchase Class D shares subject
to the $1,000 minimum initial investment requirement of that Class of the Fund.
See "No Load Alternative--Class D Shares" below.
The Distributor must be notified by DWR or a Selected Broker-Dealer or the
shareholder at the time a purchase order is placed that the purchase qualifies
for the reduced charge under the Right of Accumulation. Similar notification
must be made in writing by the dealer or shareholder when such an
22
<PAGE>
order is placed by mail. The reduced sales charge will not be granted if: (a)
such notification is not furnished at the time of the order; or (b) a review of
the records of the Selected Broker-Dealer or the Transfer Agent fails to confirm
the investor's represented holdings.
Letter of Intent. The foregoing schedule of reduced sales charges will also
be available to investors who enter into a written Letter of Intent providing
for the purchase, within a thirteen-month period, of Class A shares of the Fund
from DWR or other Selected Broker-Dealers. The cost of Class A shares of the
Fund or shares of other Dean Witter Funds which were previously purchased at a
price including a front-end sales charge during the 90-day period prior to the
date of receipt by the Distributor of the Letter of Intent, or of Class A shares
of the Fund or shares of other Dean Witter Funds acquired in exchange for shares
of such funds purchased during such period at a price including a front-end
sales charge, which are still owned by the shareholder, may also be included in
determining the applicable reduction.
Additional Net Asset Value Purchase Options. In addition to investments of
$1 million or more, Class A shares also may be purchased at net asset value by
the following:
(1) trusts for which DWT, (an affiliate of the Investment Manager) provides
discretionary trustee services;
(2) persons participating in a fee-based program approved by the
Distributor, pursuant to which such persons pay an asset based fee for services
in the nature of investment advisory or administrative services (such
investments are subject to all of the terms and conditions of such programs,
which may include termination fees, mandatory redemption upon termination and
such other circumstances as specified in the programs' agreements, and
restrictions on transferability of Fund shares);
(3) employer-sponsored 401(k) and other plans qualified under Section 401(a)
of the Internal Revenue Code ("Qualified Retirement Plans") with at least 200
eligible employees and for which DWT serves as Trustee or DWR's Retirement Plan
Services serves as recordkeeper pursuant to a written Recordkeeping Services
Agreement;
(4) Qualified Retirement Plans for which DWT serves as Trustee or DWR's
Retirement Plan Services serves as recordkeeper pursuant to a written
Recordkeeping Services Agreement whose Class B shares have converted to Class A
shares, regardless of the plan's asset size or number of eligible employees;
(5) investors who are clients of a Dean Witter account executive who joined
Dean Witter from another investment firm within six months prior to the date of
purchase of Fund shares by such investors, if the shares are being purchased
with the proceeds from a redemption of shares of an open-end proprietary mutual
fund of the account executive's previous firm which imposed either a front-end
or deferred sales charge, provided such purchase was made within sixty days
after the redemption and the proceeds of the redemption had been maintained in
the interim in cash or a money market fund; and
(6) other categories of investors, at the discretion of the Board, as
disclosed in the then current prospectus of the Fund.
No CDSC will be imposed on redemptions of shares purchased pursuant to
paragraphs (1), (2) or (5), above.
For further information concerning purchases of the Fund's shares, contact
DWR or another Selected Broker-Dealer or consult the Statement of Additional
Information.
CONTINGENT DEFERRED SALES CHARGE
ALTERNATIVE--CLASS B SHARES
Class B shares are sold at net asset value next determined without an
initial sales charge so that the full amount of an investor's purchase payment
may be immediately invested in the Fund. A CDSC, however, will be imposed on
most Class B shares redeemed within six years after purchase. The
23
<PAGE>
CDSC will be imposed on any redemption of shares if after such redemption the
aggregate current value of a Class B account with the Fund falls below the
aggregate amount of the investor's purchase payments for Class B shares made
during the six years (or, in the case of shares held by certain Qualified
Retirement Plans, three years) preceding the redemption. In addition, Class B
shares are subject to an annual 12b-1 fee of 1.0% of the lesser of: (a) the
average daily aggregate gross sales of the Fund's Class B shares since the
inception of the Fund (not including reinvestments of dividends or capital gains
distributions), less the average daily aggregate net asset value of the Fund's
Class B shares redeemed since the Fund's inception upon which a CDSC has been
imposed or waived, or (b) the average daily net assets of Class B.
Except as noted below, Class B shares of the Fund which are held for six
years or more after purchase (calculated from the last day of the month in which
the shares were purchased) will not be subject to any CDSC upon redemption.
Shares redeemed earlier than six years after purchase may, however, be subject
to a CDSC which will be a percentage of the dollar amount of shares redeemed and
will be assessed on an amount equal to the lesser of the current market value or
the cost of the shares being redeemed. The size of this percentage will depend
upon how long the shares have been held, as set forth in the following table:
<TABLE>
<CAPTION>
YEAR SINCE PURCHASE CDSC AS A PERCENTAGE
PAYMENT MADE OF AMOUNT REDEEMED
- -------------------------------------- ---------------------
<S> <C>
First................................. 5.0%
Second................................ 4.0%
Third................................. 3.0%
Fourth................................ 2.0%
Fifth................................. 2.0%
Sixth................................. 1.0%
Seventh and thereafter................ None
</TABLE>
In the case of Class B shares of the Fund purchased on or after July 28,
1997 by Qualified Retirement Plans for which DWT serves as Trustee or DWR's
Retirement Plan Services serves as recordkeeper pursuant to a written
Recordkeeping Services Agreement, shares held for three years or more after
purchase (calculated as described in the paragraph above) will not be subject to
any CDSC upon redemption. However, shares redeemed earlier than three years
after purchase may be subject to a CDSC (calculated as described in the
paragraph above), the percentage of which will depend on how long the shares
have been held, as set forth in the following table:
<TABLE>
<CAPTION>
YEAR SINCE PURCHASE CDSC AS A PERCENTAGE
PAYMENT MADE OF AMOUNT REDEEMED
- -------------------------------------- ---------------------
<S> <C>
First................................. 2.0%
Second................................ 2.0%
Third................................. 1.0%
Fourth and thereafter................. None
</TABLE>
CDSC Waivers. A CDSC will not be imposed on: (i) any amount which
represents an increase in value of shares purchased within the six years (or, in
the case of shares held by certain Qualified Retirement Plans, three years)
preceding the redemption; (ii) the current net asset value of shares purchased
more than six years (or, in the case of shares held by certain Qualified
Retirement Plans, three years) prior to the redemption; and (iii) the current
net asset value of shares purchased through reinvestment of dividends or
distributions and/or shares acquired in exchange for shares of FSC Funds or of
other Dean Witter Funds acquired in exchange for such shares. Moreover, in
determining whether a CDSC is applicable it will be assumed that amounts
described in (i), (ii) and (iii) above (in that order) are redeemed first.
In addition, the CDSC, if otherwise applicable, will be waived in the case
of:
(1) redemptions of shares held at the time a shareholder dies or becomes
disabled, only if the shares are: (a) registered either in the name of an
individual shareholder (not a trust), or in the names of such shareholder and
his or her spouse as joint tenants with right of survivorship; or (b) held in
a qualified corporate or self-employed retirement
24
<PAGE>
plan, Individual Retirement Account ("IRA") or Custodial Account under Section
403(b)(7) of the Internal Revenue Code ("403(b) Custodial Account"), provided in
either case that the redemption is requested within one year of the death or
initial determination of disability;
(2) redemptions in connection with the following retirement plan
distributions: (a) lump-sum or other distributions from a qualified corporate
or self-employed retirement plan following retirement (or, in the case of a "key
employee" of a "top heavy" plan, following attainment of age 59 1/2); (b)
distributions from an IRA or 403(b) Custodial Account following attainment of
age 59 1/2; or (c) a tax-free return of an excess contribution to an IRA; and
(3) all redemptions of shares held for the benefit of a participant in a
Qualified Retirement Plan which offers investment companies managed by the
Investment Manager or its subsidiary, Dean Witter Services Company Inc., as
self-directed investment alternatives and for which DWT serves as Trustee or
DWR's Retirement Plan Services serves as recordkeeper pursuant to a written
Recordkeeping Services Agreement ("Eligible Plan"), provided that either: (a)
the plan continues to be an Eligible Plan after the redemption; or (b) the
redemption is in connection with the complete termination of the plan involving
the distribution of all plan assets to participants.
With reference to (1) above, for the purpose of determining disability, the
Distributor utilizes the definition of disability contained in Section 72(m)(7)
of the Internal Revenue Code, which relates to the inability to engage in
gainful employment. With reference to (2) above, the term "distribution" does
not encompass a direct transfer of IRA, 403(b) Custodial Account or retirement
plan assets to a successor custodian or trustee. All waivers will be granted
only following receipt by the Distributor of confirmation of the shareholder's
entitlement.
Conversion to Class A Shares. All shares of the Fund held prior to July 28,
1997 have been designated Class B shares. Shares held before May 1, 1997 will
convert to Class A shares in May, 2007. In all other instances Class B shares
will convert automatically to Class A shares, based on the relative net asset
values of the shares of the two Classes on the conversion date, which will be
approximately ten (10) years after the date of the original purchase. The ten
year period is calculated from the last day of the month in which the shares
were purchased or, in the case of Class B shares acquired through an exchange or
a series of exchanges, from the last day of the month in which the original
Class B shares were purchased, provided that shares originally purchased before
May 1, 1997 will convert to Class A shares in May, 2007. The conversion of
shares purchased on or after May 1, 1997 will take place in the month following
the tenth anniversary of the purchase. There will also be converted at that time
such proportion of Class B shares acquired through automatic reinvestment of
dividends and distributions owned by the shareholder as the total number of his
or her Class B shares converting at the time bears to the total number of
outstanding Class B shares purchased and owned by the shareholder. In the case
of Class B shares held by a Qualified Retirement Plan to which DWT serves as
DWR's Retirement Plan Services serves as recordkeeper pursuant to a written
Recordkeeping Services Agreement, the plan is treated as a single investor and
all Class B shares will convert to Class A shares on the conversion date of the
first shares of a Dean Witter Multi-Class Fund purchased by that plan. In the
case of Class B shares previously exchanged for shares of an "Exchange Fund"
(see "Shareholder Services-- Exchange Privilege"), the period of time the shares
were held in the Exchange Fund (calculated from the last day of the month in
which the Exchange Fund shares were acquired) is excluded from the holding
period for conversion. If those shares are subsequently re-exchanged for Class B
shares of a Dean Witter Multi-Class Fund, the holding period resumes on the last
day of the month in which Class B shares are reacquired.
25
<PAGE>
If a shareholder has received share certificates for Class B shares, such
certificates must be delivered to the Transfer Agent at least one week prior to
the date for conversion. Class B shares evidenced by share certificates that are
not received by the Transfer Agent at least one week prior to any conversion
date will be converted into Class A shares on the next scheduled conversion date
after such certificates are received.
Effectiveness of the conversion feature is subject to the continuing
availability of a ruling of the Internal Revenue Service or an opinion of
counsel that (i) the conversion of shares does not constitute a taxable event
under the Internal Revenue Code, (ii) Class A shares received on conversion will
have a basis equal to the shareholder's basis in the converted Class B shares
immediately prior to the conversion, and (iii) Class A shares received on
conversion will have a holding period that includes the holding period of the
converted Class B shares. The conversion feature may be suspended if the ruling
or opinion is no longer available. In such event, Class B shares would continue
to be subject to Class B 12b-1 fees.
LEVEL LOAD ALTERNATIVE--CLASS C SHARES
Class C shares are sold at net asset value next determined without an
initial sales charge but are subject to a CDSC of 1.0% on most redemptions made
within one year after purchase (calculated from the last day of the month in
which the shares were purchased). The CDSC will be assessed on an amount equal
to the lesser of the current market value or the cost of the shares being
redeemed. The CDSC will not be imposed in the circumstances set forth above in
the section "Contingent Deferred Sales Charge Alternative--Class B Shares--CDSC
Waivers," except that the references to six years in the first paragraph of that
section shall mean one year in the case of Class C shares. Class C shares are
subject to an annual 12b-1 fee of up to 1.0% of the average daily net assets of
the Class. Unlike Class B shares, Class C shares have no conversion feature and,
accordingly, an investor that purchases Class C shares will be subject to 12b-1
fees applicable to Class C shares for an indefinite period subject to annual
approval by the Fund's Board of Trustees and regulatory limitations.
NO LOAD ALTERNATIVE--CLASS D SHARES
Class D shares are offered without any sales charge on purchase or
redemption and without any 12b-1 fee. Class D shares are offered only to
investors meeting an initial investment minimum of $5 million ($25 million for
Qualified Retirement Plans for which DWT serves as Trustee or DWR's Retirement
Plan Services serves as recordkeeper pursuant to a written Recordkeeping
Services Agreement) and the following categories of investors: (i) investors
participating in the InterCapital mutual fund asset allocation program pursuant
to which such persons pay an asset based fee; (ii) persons participating in a
fee-based program approved by the Distributor, pursuant to which such persons
pay an asset based fee for services in the nature of investment advisory or
administrative services (subject to all of the terms and conditions of such
programs referred to in (i) and (ii) above, which may include termination fees,
mandatory redemption upon termination and such other circumstances as specified
in the programs agreements, and restrictions on transferability of Fund shares);
(iii) 401(k) plans established by DWR and SPS Transaction Services, Inc. (an
affiliate of DWR) for their employees; (iv) certain Unit Investment Trusts
sponsored by DWR; (v) certain other open-end investment companies whose shares
are distributed by the Distributor; and (vi) other categories of investors, at
the discretion of the Board, as disclosed in the then current prospectus of the
Fund. Investors who require a $5 million (or $25 million) minimum initial
investment to qualify to purchase Class D shares may satisfy that requirement by
investing that amount in a single transaction in Class D shares of the Fund and
other Dean Witter Multi-Class Funds, subject to the $1,000 minimum initial
investment required for that Class of the Fund. In addition, for the purpose of
meeting the $5 million (or $25 million) minimum investment amount, holdings of
26
<PAGE>
Class A shares in all Dean Witter Multi-Class Funds, shares of FSC Funds and
shares of Dean Witter Funds for which such shares have been exchanged will be
included together with the current investment amount. If a shareholder redeems
Class A shares and purchases Class D shares, such redemption may be a taxable
event.
PLAN OF DISTRIBUTION
The Fund has adopted a Plan of Distribution pursuant to Rule 12b-1 under the
Act with respect to the distribution of Class A, Class B and Class C shares of
the Fund. In the case of Class A and Class C shares, the Plan provides that the
Fund will reimburse the Distributor and others for the expenses of certain
activities and services incurred by them specifically on behalf of those shares.
Reimbursements for these expenses will be made in monthly payments by the Fund
to the Distributor, which will in no event exceed amounts equal to payments at
the annual rates of 0.25% and 1.0% of the average daily net assets of Class A
and Class C, respectively. In the case of Class B shares, the Plan provides that
the Fund will pay the Distributor a fee, which is accrued daily and paid
monthly, at the annual rate of 1.0% of the lesser of: (a) the average daily
aggregate gross sales of the Fund's Class B shares since the inception of the
Fund (not including reinvestments of dividends or capital gains distributions),
less the average daily aggregate net asset value of the Fund's Class B shares
redeemed since the Fund's inception upon which a CDSC has been imposed or
waived, or (b) the average daily net assets of Class B. The fee is treated by
the Fund as an expense in the year it is accrued. In the case of Class A shares,
the entire amount of the fee currently represents a service fee within the
meaning of the NASD guidelines. In the case of Class B and Class C shares, a
portion of the fee payable pursuant to the Plan, equal to 0.25% of the average
daily net assets of each of these Classes, is currently characterized as a
service fee. A service fee is a payment made for personal service and/or the
maintenance of shareholder accounts.
Additional amounts paid under the Plan in the case of Class B and Class C
shares are paid to the Distributor for services provided and the expenses borne
by the Distributor and others in the distribution of the shares of those
Classes, including the payment of commissions for sales of the shares of those
Classes and incentive compensation to and expenses of DWR's account executives
and others who engage in or support distribution of shares or who service
shareholder accounts, including overhead and telephone expenses; printing and
distribution of prospectuses and reports used in connection with the offering of
the Fund's shares to other than current shareholders; and preparation, printing
and distribution of sales literature and advertising materials. In addition, the
Distributor may utilize fees paid pursuant to the Plan in the case of Class B
shares to compensate DWR and other Selected Broker-Dealers for their opportunity
costs in advancing such amounts, which compensation would be in the form of a
carrying charge on any unreimbursed expenses.
For the fiscal year ended November 30, 1997, Class B shares of the Fund
accrued payments under the Plan amounting to $3,434,993, which amount is equal
to 1.00% of the average daily net assets of Class B for the fiscal year. These
payments were calculated pursuant to clause (b) of the compensation formula
under the Plan. All shares held prior to July 28, 1997 have been designated
Class B shares. For the fiscal period July 28 through November 30, 1997, Class A
and Class C shares of the Fund accrued payments under the Plan amounting to $197
and $2,400, respectively, which amounts are equal to 0.25% and 1.00% of the
average daily net assets of Class A and Class C, respectively, for such period.
In the case of Class B shares, at any given time, the expenses in
distributing Class B shares of the Fund may be in excess of the total of (i) the
payments made by the Fund pursuant to the Plan, and (ii) the proceeds of CDSCs
paid by investors upon the redemption of Class B shares. For example, if $1
million in expenses in distributing Class B shares
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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 such excess amounts, including the carrying charge
described above, totalled $12,299,293 at November 30, 1997, which was equal to
3.37% 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
or any requirement that the Plan be continued from year to year, such 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 account executives at the time of sale may be
reimbursed in the subsequent calendar year. The Distributor has advised the Fund
that unreimbursed expenses representing a gross sales commission credited to
account executives at the time of sale totalled $12,499 in the case of Class C
at December 31, 1997, which amount was equal to 0.62% of the net assets of Class
C on such date, and that there were no such expenses that may be reimbursed in
the subsequent year in the case of Class A on such date. No interest or other
financing charges will be incurred on any Class A or Class C distribution
expenses incurred by the Distributor under the Plan or on any unreimbursed
expenses due to the Distributor pursuant to the Plan.
DETERMINATION OF NET ASSET VALUE
The net asset value per share is determined once daily at 4:00 p.m., New
York time, on each day that the New York Stock Exchange is open (or, on days
when the New York Stock Exchange closes prior to 4:00 p.m., at such earlier
time), by taking net assets of the Fund, dividing by the number of shares
outstanding and adjusting to the nearest cent. The assets belonging to the Class
A, Class B, Class C and Class D shares will be invested together in a single
portfolio. The net asset value of each Class, however, will be determined
separately by subtracting each Class's accrued expenses and liabilities. The net
asset value per share will not be determined on Good Friday and on such other
federal and non-federal holidays as are observed by the New York Stock Exchange.
In the calculation of the Fund's net asset value: (1) an equity portfolio
security listed or traded on the New York or American Stock Exchange or other
domestic or foreign stock exchange is valued at its latest sale price on that
exchange, prior to the time assets are valued; if there were no sales that day,
the security is valued at the latest bid price (in cases where a security is
traded on more than one exchange, the security is valued on the exchange
designated as the primary market pursuant to procedures adopted by the
Trustees); 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 that sale and 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 Board of Trustees. For valuation purposes,
quotations of foreign portfolio securities, other assets and liabilities and
forward contracts stated in foreign currency are translated into U.S. dollar
equivalents at the prevailing market rates
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prior to the close of the New York Stock Exchange. Dividends receivable are
accrued as of the ex-dividend date or as of the time that the relevant ex-
dividend date and amounts become known.
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.
SHAREHOLDER SERVICES
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Automatic Investment of Dividends and Distributions. All income dividends
and capital gains distributions are automatically paid in full and fractional
shares of the applicable Class of the Fund (or, if specified by the shareholder,
in shares of any other open-end Dean Witter Fund), unless the shareholder
requests that they be paid in cash. Shares as acquired are acquired at net asset
value and are not subject to the imposition of a front-end sales charge or a
CDSC (see "Redemptions and Repurchases").
Investment of Dividends and Distributions Received in Cash. Any shareholder
who receives a cash payment representing a dividend or capital gains
distribution may invest such dividend or distribution in shares of the
applicable Class at the net asset value per share next determined after receipt
by the Transfer Agent, by returning the check or the proceeds to the Transfer
Agent within thirty days after the payment date. Shares so acquired are acquired
at net asset value and are not subject to the imposition of a front-end sales
charge or a CDSC upon their redemption (see "Redemptions and Repurchases").
EasyInvest-Sm-. Shareholders may subscribe to EasyInvest, an automatic
purchase plan which provides for any amount from $100 to $5,000 to be
transferred automatically from a checking or savings account, or following
redemption of shares of a Dean Witter money market fund, on a semi-monthly,
monthly or quarterly basis, to the Transfer Agent for investment in shares of
the Fund (see "Purchase of Fund Shares" and "Redemptions and
Repurchases--Involuntary Redemption").
Systematic Withdrawal Plan. A systematic withdrawal plan (the "Withdrawal
Plan") is available for shareholders who own or purchase shares of the Fund
having a minimum value of $10,000 based upon the then current net asset value.
The Withdrawal Plan provides for monthly or quarterly (March, June, September
and December) checks in any dollar amount, not less than $25, or in any whole
percentage of the account balance, on an annualized basis. Any applicable CDSC
will be imposed on shares redeemed under the Withdrawal Plan (see "Purchase of
Fund Shares"). Therefore, any shareholder participating in the Withdrawal Plan
will have sufficient shares redeemed from his or her account so that the
proceeds (net of any applicable CDSC) to the shareholder will be the designated
monthly or quarterly amount.
Withdrawal Plan payments should not be considered as dividends, yields or
income. If periodic withdrawal plan payments continuously exceed net investment
income and net capital gains, the shareholder's original investment will be
correspondingly reduced and ultimately exhausted. Each withdrawal constitutes a
redemption of shares and any gain or loss realized must be recognized for
federal income tax purposes.
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Shareholders should contact their DWR or other Selected Broker-Dealer
account executive or the Transfer Agent for further information about any of the
above services.
Tax-Sheltered Retirement Plans. Retirement plans are available for use by
corporations, the self-employed, Individual Retirement Accounts and Custodial
Accounts under Section 403(b)(7) of the Internal Revenue Code. Adoption of such
plans should be on advice of legal counsel or tax adviser.
For further information regarding plan administration, custodial fees and
other details, investors should contact their DWR or other Selected Broker-
Dealer account executive or the Transfer Agent.
EXCHANGE PRIVILEGE
Shares of each Class may be exchanged for shares of the same Class of any
other Dean Witter Multi-Class Fund without the imposition of any exchange fee.
Shares may also be exchanged for shares of the following funds: Dean Witter
Short-Term U.S. Treasury Trust, Dean Witter Limited Term Municipal Trust, Dean
Witter Short-Term Bond Fund, Dean Witter Intermediate Term U.S. Treasury Trust
and five Dean Witter funds which are money market funds (the "Exchange Funds").
Class A shares may also be exchanged for shares of Dean Witter Multi-State
Municipal Series Trust and Dean Witter Hawaii Municipal Trust, which are Dean
Witter Funds sold with a front-end sales charge ("FSC Funds"). Class B shares
may also be exchanged for shares of Dean Witter Global Short-Term Income Fund
Inc. ("Global Short-Term"), which is a Dean Witter Fund offered with a CDSC.
Exchanges may be made after the shares of the Fund acquired by purchase (not by
exchange or dividend reinvestment) have been held for thirty days. There is no
waiting period for exchanges of shares acquired by exchange or dividend
reinvestment.
An exchange to another Dean Witter Multi-Class Fund, any FSC Fund, Global
Short-Term or any Exchange Fund that is not a money market fund is on the basis
of the next calculated net asset value per share of each fund after the exchange
order is received. When exchanging into a money market fund from the Fund,
shares of the Fund are redeemed out of the Fund at their next calculated net
asset value and the proceeds of the redemption are used to purchase shares of
the money market fund at their net asset value determined the following business
day. Subsequent exchanges between any of the money market funds and any of the
Dean Witter Multi-Class Funds, FSC Funds, Global Short-Term or any Exchange Fund
that is not a money market fund can be effected on the same basis.
No CDSC is imposed at the time of any exchange of shares, although any
applicable CDSC will be imposed upon ultimate redemption. During the period of
time the shareholder remains in an Exchange Fund (calculated from the last day
of the month in which the Exchange Fund shares were acquired), the holding
period (for the purpose of determining the rate of the CDSC) is frozen. If those
shares are subsequently re-exchanged for shares of a Dean Witter Multi-Class
Fund or shares of Global Short-Term, the holding period previously frozen when
the first exchange was made resumes on the last day of the month in which shares
of a Dean Witter Multi-Class Fund or shares of Global Short-Term are reacquired.
Thus, the CDSC is based upon the time (calculated as described above) the
shareholder was invested in shares of a Dean Witter Multi-Class Fund or in
shares of Global Short-Term (see "Purchase of Fund Shares"). In the case of
exchanges of Class A shares which are subject to a CDSC, the holding period also
includes the time (calculated as described above) the shareholder was invested
in shares of a FSC Fund. In the case of shares exchanged into an Exchange Fund
on or after April 23, 1990, upon a redemption of shares which results in a CDSC
being imposed, a credit (not to exceed the amount of the CDSC) will be given in
an amount equal to the Exchange Fund 12b-1 distribution fees incurred on or
after that date which are attributable to those shares. (Exchange Fund 12b-1
distribution fees are described in the prospectuses for those funds.) Class B
shares of the Fund acquired in exchange for shares of Global
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Short-Term or Class B shares of another Dean Witter Multi-Class Fund having a
different CDSC schedule than that of this Fund will be subject to the higher
CDSC schedule, even if such shares are subsequently re-exchanged for shares of
the fund with the lower CDSC schedule.
Additional Information Regarding Exchanges. Purchases and exchanges should
be made for investment purposes only. A pattern of frequent exchanges may be
deemed by the Investment Manager to be abusive and contrary to the best
interests of the Fund's other shareholders and, at the Investment Manager's
discretion, may be limited by the Fund's refusal to accept additional purchases
and/ or exchanges from the investor. Although the Fund does not have any
specific definition of what constitutes a pattern of frequent exchanges, and
will consider all relevant factors in determining whether a particular situation
is abusive and contrary to the best interests of the Fund and its other
shareholders, investors should be aware that the Fund and each of the other Dean
Witter Funds may in their discretion limit or otherwise restrict the number of
times this Exchange Privilege may be exercised by any investor. Any such
restriction will be made by the Fund on a prospective basis only, upon notice to
the shareholder not later than ten days following such shareholder's most recent
exchange. Also, the Exchange Privilege may be terminated or revised at any time
by the Fund and/or any of such Dean Witter Funds for which shares of the Fund
have been exchanged, upon such notice as may be required by applicable
regulatory agencies. Shareholders maintaining margin accounts with DWR or
another Selected Broker-Dealer are referred to their account executive regarding
restrictions on exchange of shares of the Fund pledged in the margin account.
The current prospectus for each fund describes its investment objective(s)
and policies, and shareholders should obtain a copy and examine it carefully
before investing. Exchanges are subject to the minimum investment requirement of
each Class of shares and any other conditions imposed by each fund. In the case
of any shareholder holding a share certificate or certificates, no exchanges may
be made until all applicable share certificates have been received by the
Transfer Agent and deposited in the shareholder's account. An exchange will be
treated for federal income tax purposes the same as a repurchase or redemption
of shares, on which the shareholder may realize a capital gain or loss. However,
the ability to deduct capital losses on an exchange may be limited in situations
where there is an exchange of shares within ninety days after the shares are
purchased. The Exchange Privilege is only available in states where an exchange
may legally be made.
If DWR or another Selected Broker-Dealer is the current dealer of record and
its account numbers are part of the account information, shareholders may
initiate an exchange of shares of the Fund for shares of any of the Dean Witter
Funds (for which the Exchange Privilege is available) pursuant to this Exchange
Privilege by contacting their account executive (no Exchange Privilege
Authorization Form is required). Other shareholders (and those shareholders who
are clients of DWR or another Selected Broker-Dealer but who wish to make
exchanges directly by writing or telephoning the Transfer Agent) must complete
and forward to the Transfer Agent an Exchange Privilege Authorization Form,
copies of which may be obtained from the Transfer Agent, to initiate an
exchange. If the Authorization Form is used, exchanges may be made in writing or
by contacting the Transfer Agent at (800) 869-NEWS (toll-free).
The Fund will employ reasonable procedures to confirm that exchange
instructions communicated over the telephone are genuine. Such procedures may
include requiring various forms of personal identification such as name, mailing
address, social security or other tax identification number and DWR or other
Selected Broker-Dealer account number (if any). Telephone instructions may also
be recorded. If such procedures are not employed, the Fund may be liable for any
losses due to unauthorized or fraudulent instructions.
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Telephone exchange instructions will be accepted if received by the Transfer
Agent between 9:00 a.m. and 4:00 p.m., New York time, on any day the New York
Stock Exchange is open. Any shareholder wishing to make an exchange, who has
previously filed an Exchange Privilege Authorization Form and who is unable to
reach the Fund by telephone, should contact his or her DWR or other Selected
Broker-Dealer account executive, if appropriate, or make a written exchange
request. Share-
holders are advised that during periods of drastic economic or market changes,
it is possible that the telephone exchange procedures may be difficult to
implement, although this has not been the experience with the Dean Witter Funds
in the past.
Shareholders should contact their DWR or other Selected Broker-Dealer
account executive or the Transfer Agent for further information about the
Exchange Privilege.
REDEMPTIONS AND REPURCHASES
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Redemption. Shares of each Class of the Fund can be redeemed for cash at
any time at the net asset value per share next determined less the amount of any
applicable CDSC in the case of Class A, Class B or Class C shares (see "Purchase
of Fund Shares"). If shares are held in a shareholder's account without a share
certificate, a written request for redemption sent to the Fund's Transfer Agent
at P.O. Box 983, Jersey City, NJ 07303 is required. If certificates are held by
the shareholder, the shares may be redeemed by surrendering the certificates
with a written request for redemption, along with any additional information
required by the Transfer Agent.
Repurchase. DWR and other Selected Broker-Dealers are authorized to
repurchase shares represented by a share certificate which is delivered to any
of their offices. Shares held in a shareholder's account without a share
certificate may also be repurchased by DWR and other Selected Broker-Dealers
upon the telephonic or telegraphic request of the shareholder. The repurchase
price is the net asset value next computed (see "Purchase of Fund Shares") after
such repurchase order is received by DWR or other Selected Broker-Dealer,
reduced by any applicable CDSC.
The CDSC, if any, will be the only fee imposed by the Fund or the
Distributor. The offer by DWR and other Selected Broker-Dealers to repurchase
shares may be suspended without notice by the Distributor at any time. In that
event, shareholders may redeem their shares through the Fund's Transfer Agent as
set forth above under "Redemption."
Payment for Shares Redeemed or Repurchased. Payment for shares presented
for repurchase or redemption will be made by check within seven days after
receipt by the Transfer Agent of the certificate and/or written request in good
order. Such payment may be postponed or the right of redemption suspended under
unusual circumstances; E.G., when normal trading is not taking place on the New
York Stock Exchange. If the shares to be redeemed have recently been purchased
by check, payment of the redemption proceeds may be delayed for the minimum time
needed to verify that the check used for investment has been honored (not more
than fifteen days from the time of receipt of the check by the Transfer Agent).
Shareholders maintaining margin accounts with DWR or another Selected
Broker-Dealer are referred to their account executive regarding restrictions on
redemption of shares of the Fund pledged in the margin account.
Reinstatement Privilege. A shareholder who has had his or her shares
redeemed or repurchased and has not previously exercised this reinstatement
privilege may, within 35 days after the date of the redemption or repurchase,
reinstate any portion or all of the proceeds of such redemption or repurchase in
shares of the Fund in the same Class from which such shares were redeemed or
repurchased
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at their net asset value next determined after a reinstatement request, together
with the proceeds, is received by the Transfer Agent and receive a pro rata
credit for any CDSC paid in connection with such redemption or repurchase.
Involuntary Redemption. The Fund reserves the right to redeem, on sixty
days' notice and at net asset value, the shares of any shareholder (other than
shares held in an Individual Retirement Account or Custodial Account under
Section 403(b)(7) of the Internal Revenue Code) whose shares due to redemptions
by the shareholder have a value of less than $100 or such lesser amount as may
be fixed by the Trustees or, in the case of an account opened through
EasyInvest-SM-, if after twelve months the shareholder has invested less than
$1,000 in the account. However, before the Fund redeems such shares and sends
the proceeds to the shareholder, it will notify the shareholder that the value
of the shares is less than the applicable amount and allow him or her sixty days
to make an additional investment in an amount which will increase the value of
his or her account to at least the applicable amount before the redemption is
processed. No CDSC will be imposed on any involuntary redemption.
DIVIDENDS, DISTRIBUTIONS AND TAXES
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Dividends and Distributions. The Fund declares dividends separately for
each Class of Shares and intends to pay quarterly income dividends and to
distribute net short-term and net long-term capital gains, if any, at least once
each year. The Fund may, however, determine either to distribute or to retain
all or part of any long-term capital gains in any year for reinvestment.
All dividends and any capital gains distributions will be paid in additional
shares of the same Class and automatically credited to the shareholder's account
without issuance of a share certificate unless the shareholder requests in
writing that all dividends and/or distributions be paid in cash. Shares acquired
by dividend and distribution reinvestments will not be subject to any front-end
sales charge or CDSC. Class B shares acquired through dividend and distribution
reinvestments will become eligible for conversion to Class A shares on a pro
rata basis. Distributions paid on Class A and Class D shares will be higher than
for Class B and Class C shares because distribution fees paid by Class B and
Class C shares are higher. (See "Shareholder Services--Automatic Investment of
Dividends and Distributions".)
Taxes. Because the Fund intends to distribute all of its net investment
income and net short-term capital gains to shareholders and otherwise qualify as
a regulated investment company under Subchapter M of the Internal Revenue Code,
it is not expected that the Fund will be required to pay any Federal income tax
on any such income and capital gains. Shareholders will normally have to pay
Federal income taxes, and any state and local income taxes, on the dividends and
distributions they receive from the Fund. Such dividends and distributions, to
the extent they are derived from net investment income and net short-term
capital gains, are taxable to the shareholder as ordinary dividend income
regardless of whether the shareholder receives such payments in additional
shares or in cash. Any dividends declared in the last quarter of any calendar
year which are paid in the following year prior to February 1 will be deemed,
for tax purposes, to have been received by the shareholder in the prior year.
Distributions of net long-term capital gains, if any, are taxable to
shareholders as long-term capital gains regardless of how long a shareholder has
held the Fund's shares and regardless of whether the distribution is received in
additional shares or in cash. Capital gains distributions are not eligible for
the dividends received deduction.
The Fund may at times make payments from sources other than income or net
capital gains. Payments from such sources will, in effect, represent a
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return of a portion of each shareholder's investment. All, or a portion, of such
payments will not be taxable to shareholders.
After the end of the calendar year, shareholders will be sent full
information on their dividends and capital gains distributions for tax purposes.
Shareholders will also be notified of their proportionate share of long-term
capital gains distributions that are eligible for a reduced rate of tax under
the Taxpayer Relief Act of 1997.
To avoid being subject to a 31% federal backup withholding tax on taxable
dividends, capital gains distributions and the proceeds of redemptions and
repurchases, shareholders' taxpayer identification numbers must be furnished and
certified as to their accuracy.
Dividends, interest and gains received by the Fund may give rise to
withholding and other taxes imposed by foreign countries. If it qualifies for
and makes the appropriate election with the Internal Revenue Service, the Fund
will report annually to its shareholders the amount per share of such taxes to
enable shareholders to claim United States foreign tax credits or deductions
with respect to such taxes. In the absence of such an election, the Fund would
deduct foreign tax in computing the amount of its distributable income.
Shareholders should consult their tax advisers as to the applicability of
the foregoing to their current situation.
PERFORMANCE INFORMATION
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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 total return of the Fund is based on
historical earnings and is not intended to indicate future performance.
The "average annual total return" of the Fund refers to a figure reflecting
the average annualized percentage increase (or decrease) in the value of an
initial investment in a Class of the Fund of $1,000 over periods of one, five
and ten years, or over the life of the Fund, if less than any of the foregoing.
Average annual total return reflects all income earned by the Fund, any
appreciation or depreciation of the Fund's assets, all expenses incurred by the
applicable Class and all sales charges which would be incurred by shareholders,
for the stated
periods. It also assumes reinvestment of all dividends and distributions paid by
the Fund.
In addition to the foregoing, the Fund may advertise its total return for
each Class over different periods of time by means of aggregate, average, and
year-by-year or other types of total return figures. Such calculations may or
may not reflect the deduction of any sales charge which, if reflected, would
reduce the performance quoted. The Fund may also advertise the growth of
hypothetical investments of $10,000, $50,000 and $100,000 in each Class of
shares of the Fund. The Fund from time to time may also advertise its
performance relative to certain performance rankings and indexes compiled by
independent organizations such as mutual fund performance rankings of Lipper
Analytical Services, Inc., the S&P Stock Index and the Dow Jones Industrial
Average.
ADDITIONAL INFORMATION
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VOTING RIGHTS. All shares of beneficial interest of the Fund are of $0.01
par value and are equal as to earnings, assets and voting privileges except that
each Class 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
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shareholders will have the right to vote on any proposed material increase in
Class A's expenses, if such proposal is submitted separately to Class A
shareholders. Also, as discussed herein, Class A, Class B and Class C bear the
expenses related to the distribution of their respective shares.
The Fund is not required to hold Annual Meetings of Shareholders and, in
ordinary circumstances, the Fund does not intend to hold such meetings. The
Trustees may call Special Meetings of Shareholders for action by shareholder
vote as may be required by the Act or the Declaration of Trust. Under certain
circumstances the Trustees may be removed by action of the Trustees or by the
shareholders.
Under Massachusetts law, shareholders of a business trust may, under certain
circumstances, be held personally liable as partners for obligations of the
Fund. However, the Declaration of Trust contains an express disclaimer of
shareholder liability for acts or obligations of the Fund, requires that Fund
obligations include such disclaimer, and provides for indemnification and
reimbursement of expenses out of the Fund's property for any shareholder held
personally liable for the obligations of the Fund. Thus, the risk of a
shareholder incurring financial loss on account of shareholder liability is
limited to circumstances in which the Fund itself would be unable to meet its
obligations. Given the above limitations on shareholder personal liability, and
the nature of the Fund's assets and operations, in the opinion of Massachusetts
counsel to the Fund, the risk to shareholders of personal liability is remote.
Code of Ethics. Directors, officers and employees of InterCapital, Dean
Witter Services Company Inc. and the Distributor are subject to a strict Code of
Ethics adopted by those companies. The Code of Ethics is intended to ensure that
the interests of shareholders and other clients are placed ahead of any personal
interest, that no undue personal benefit is obtained from a person's employment
activities and that actual and potential conflicts of interest are avoided. To
achieve these goals and comply with regulatory requirements, the Code of Ethics
requires, among other things, that personal securities transactions by employees
of the companies be subject to an advance clearance process to monitor that no
Dean Witter Fund is engaged at the same time in a purchase or sale of the same
security. The Code of Ethics bans the purchase of securities in an initial
public offering, and also prohibits engaging in futures and options transactions
and profiting on short-term trading (that is, a purchase within sixty days of a
sale or a sale within sixty days of a purchase) of a security. In addition,
investment personnel may not purchase or sell a security for their personal
account within thirty days before or after any transaction in any Dean Witter
Fund managed by them. Any violations of the Code of Ethics are subject to
sanctions, including reprimand, demotion or suspension or termination of
employment. The Code of Ethics comports with regulatory requirements and the
recommendations in the 1994 report by the Investment Company Institute Advisory
Group on Personal Investing.
Master/Feeder Conversion. The Fund reserves the right to seek to achieve
its investment objective by investing all of its investable assets in a
diversified, open-end management investment company having the same investment
objective and policies and substantially the same investment restrictions as
those applicable to the Fund.
Shareholder Inquiries. All inquiries regarding the Fund should be directed
to the Fund at the telephone numbers or address set forth on the front cover of
this Prospectus.
35
<PAGE>
Dean Witter
Capital Appreciation Fund
Two World Trade Center
New York, New York 10048
TRUSTEES
Michael Bozic
Charles A. Fiumefreddo
Edwin J. Garn
John R. Haire
Wayne E. Hedien
Dr. Manuel H. Johnson
Michael E. Nugent
Philip J. Purcell
John L. Schroeder
OFFICERS
Charles A. Fiumefreddo
Chairman and Chief Executive Officer
Barry Fink
Vice President, Secretary and General Counsel
Ronald J. Worobel
Vice President
Thomas F. Caloia
Treasurer
CUSTODIAN
The Bank of New York
90 Washington Street
New York, New York 10286
TRANSFER AGENT AND
DIVIDEND DISBURSING AGENT
Dean Witter Trust FSB
Harborside Financial Center,
Plaza Two
Jersey City, New Jersey 07311
INDEPENDENT ACCOUNTANTS
Price Waterhouse LLP
1177 Avenue of the Americas
New York, New York 10036
INVESTMENT MANAGER
Dean Witter InterCapital Inc.
DEAN WITTER
CAPITAL APPRECIATION
FUND
[PHOTO]
PROSPECTUS -- JANUARY 29, 1998
<PAGE>
DEAN WITTER CAPITAL APPRECIATION FUND
LETTER TO THE SHAREHOLDERS NOVEMBER 30, 1997
TWO WORLD TRADE CENTER, NEW YORK, NEW YORK 10048
DEAR SHAREHOLDER:
Small-cap stocks got off to a slow start during the first quarter of 1997.
Inflationary concerns and fears of rising interest rates knocked the wind out of
the sails of the growth sector as investors sought safety in larger, more liquid
securities. Technology and biotechnology names particularly suffered as they
tend to be on the higher end of the multiple spectrum, making them especially
vulnerable during uncertain times. However, these concerns diminished in May and
investors began to warm up to small caps. This was the first time over the
trailing twelve-month period that we saw real signs of strength from this group.
Small caps performed in line with the market through the summer and into the
fall and then experienced the volatility commensurate with the larger indices
due to the instability of the Far East. Investor concerns switched from
containing inflation to absorbing deflation.
Current investor concerns include the impact that devalued foreign currencies
and depressed foreign economies will have on U.S. companies. It has been
encouraging to see the Dow recovering quickly as the market digests these
factors. However, secondary and tertiary names have not rebounded as quickly. We
hope to see this recovery broaden to these smaller companies in 1998.
PERFORMANCE AND PORTFOLIO
For the fiscal year ended November 30, 1997, the Fund's Class B shares produced
a total return of 9.47 percent compared to 28.53 percent for the broad
Page 1
<PAGE>
- -based Standard & Poor's 500 Composite Stock Price Index (S&P 500) and 16.82
percent for the Lipper Capital Appreciation Funds Index. The Fund's
underperformance relative to these benchmarks is due to the fact that the
Fund's portfolio has been overweighted in small-cap stocks while, during the
period under review, investors have favored larger companies. We believe that
the small-cap segment of the market remains undervalued and that, over the long
term, the segment may offer greater growth potential than the broader market.
The Fund has focused on small-cap stocks in the $5 to $25 price range with
sound fundamentals, solid earnings momentum,
DEAN WITTER CAPITAL APPRECIATION FUND
LETTER TO THE SHAREHOLDERS NOVEMBER 30, 1997, CONTINUED
financial stability and management strength, but maintains the flexibility to
seek opportunities across market capitalizations. The portfolio is diversified
among many different industries.
The accompanying chart illustrates the performance of a $10,000 investment in
the Fund from inception through the fiscal year ended November 30, 1997, versus
the performance of similar hypothetical investments in the S&P 500 and the
Lipper Capital Appreciation Funds Index.
LOOKING AHEAD
We continue to believe that the fundamental picture for small caps is bright.
The domestic interest-rate environment remains benign, economic growth is
moderate and current fiscal policy seems favorable. Many of these companies
tend to benefit from a strong dollar as they often do not have the exposure to
foreign currency weakness
Page 2
<PAGE>
that the multinationals do. We continue to see companies with inherently high
growth rates trading at severely discounted multiples. We believe that small
caps are historically undervalued and that the Fund is well positioned to
benefit when this sector rallies.
We appreciate your ongoing support of Dean Witter Capital Appreciation Fund and
look forward to continuing to serve your investment needs.
Sincerely,
/s/ Charles A. Fiumefreddo
CHARLES A. FIUMEFREDDO
CHAIRMAN OF THE BOARD
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
Growth of $10,000
- -----------------
Class B
($ in Thousands)
Average Annual
Total Returns
Life of
1 Year Fund
9.47%(1) 18.30%(1)
4.47%(2) 17.11%(2)
Lipper
Fund S&P 500 (4) (5)
October 1995 $10,000 $10,000 $10,000
November 1995 $10,530 $10,485 $10,369
November 1996 $12,990 $13,407 $12,139
November 1997 $13,920 (3) $17,232 $14,181
PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE RETURNS.
(1) Figure shown assumes reinvestment of all distributions and does not reflect
the deduction of any sales charges.
(2) Figure shown assumes reinvestment of all distributions and the deduction of
the maximum applicable contingent deferred sales charge (CDSC) (1
Page 3
<PAGE>
year-5%, since inception-3%). See the Fund's current prospectus for
complete details on fees and sales charges.
(3) Closing Value assuming a complete redemption on November 30, 1997.
(4) The Standard and Poor's 500 Composite Stock Price Index (S&P 500) is a
broad-based index, the performance of which is based on the average
performance of 500 widely held common stocks. The Index does not include any
expenses, fees or charges. The Index is unmanaged and should not be
considered an investment.
(5) The Lipper Capital Appreciation Funds Index is an equally weighted
performance index of the largest qualifying funds (based on net assets) in
the Lipper Capital Appreciation Funds Objective. The Index, which is
adjusted for capital gains distributions and income dividends, is unmanaged
and should not be considered an investment. There are currently 30 funds
represented in this Index.
DEAN WITTER CAPITAL APPRECIATION FUND
PORTFOLIO OF INVESTMENTS NOVEMBER 30, 1997
<TABLE>
<CAPTION>
NUMBER OF
SHARES VALUE
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
COMMON STOCKS (100.2%)
ADVERTISING (0.1%)
25,000 TMP Worldwide, Inc.*................................................................... $ 453,125
------------
AEROSPACE & DEFENSE (0.9%)
100,000 Kellstrom Industries, Inc.*............................................................ 2,612,500
30,000 Orbital Sciences Corp.*................................................................ 768,750
------------
3,381,250
------------
AGRICULTURE (0.1%)
20,000 Scheid Vineyards Inc. (Class A)*....................................................... 200,000
------------
AGRICULTURE RELATED (0.3%)
50,000 Agribiotech, Inc.*..................................................................... 493,750
100,000 Cadiz Land Company, Inc.*.............................................................. 718,750
------------
1,212,500
------------
ASSET MANAGEMENT (0.0%)
5,000 MAXIMUS, Inc.*......................................................................... 120,625
------------
AUTOMOTIVE (0.4%)
28,900 Avis Rent-A-Car, Inc.*................................................................. 969,956
31,600 Group 1 Automotive, Inc.*.............................................................. 306,125
------------
1,276,081
------------
BANKING (0.0%)
5,000 Net.B@nk, Inc.*........................................................................ 55,625
------------
BIOTECHNOLOGY (0.9%)
30,000 ESC Medical Systems Ltd. (Israel)*..................................................... 1,072,500
70,000 Osteotech, Inc.*....................................................................... 2,108,750
------------
3,181,250
------------
BUILDING & CONSTRUCTION (0.4%)
40,000 Dycom Industries, Inc.*................................................................ 900,000
20,000 Hospitality Worldwide Services, Inc.*.................................................. 240,000
15,000 Schuff Steel Co.*...................................................................... 165,000
900 UNIFAB International, Inc.*............................................................ 18,000
------------
1,323,000
------------
BUSINESS SERVICES (0.2%)
30,000 Wackenhut Corrections Corp.*........................................................... 840,000
------------
CEMENT (0.5%)
80,000 Giant Cement Holding, Inc.*............................................................ 1,930,000
------------
CHEMICALS - SPECIALTY (0.1%)
60,000 Eco Soil Systems, Inc.*................................................................ 337,500
------------
</TABLE>
<TABLE>
<CAPTION>
NUMBER OF
SHARES VALUE
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
COMMERCIAL SERVICES (5.2%)
80,000 Actrade International, Ltd.*........................................................... $ 2,290,000
30,000 Administaff, Inc.*..................................................................... 667,500
60,000 Billing Information Concepts Corp.*.................................................... 2,670,000
50,000 Caribiner International, Inc.*......................................................... 2,121,875
50,000 Claremont Technology Group, Inc.*...................................................... 900,000
50,000 Complete Management, Inc.*............................................................. 831,250
30,000 Crescent Operating, Inc.*.............................................................. 498,750
50,000 Grow Biz International, Inc.*.......................................................... 600,000
30,000 International Total Services, Inc.*.................................................... 461,250
30,000 Lason Holdings, Inc.*.................................................................. 836,250
10,000 Market Facts Inc.*..................................................................... 176,250
65,000 May & Speh, Inc.*...................................................................... 861,250
5,300 Metro Information Services, Inc.*...................................................... 135,150
30,000 Personnel Group of America, Inc.*...................................................... 1,096,875
50,000 Primark Corp.*......................................................................... 1,693,750
80,000 ProSoft I-Net Solutions Inc.*.......................................................... 890,000
40,000 Quebecor Printing, Inc. (Canada)....................................................... 573,114
50,000 Superior Services, Inc.*............................................................... 1,168,750
30,000 Vestcom International, Inc.*........................................................... 592,500
------------
19,064,514
------------
COMMUNICATIONS - EQUIPMENT & SOFTWARE (0.2%)
30,000 EXCEL Communications, Inc.*............................................................ 705,000
------------
COMMUNICATIONS - EQUIPMENT/MANUFACTURERS (0.3%)
30,000 Bay Networks, Inc.*.................................................................... 901,875
------------
COMPUTER EQUIPMENT (0.8%)
30,000 Kemet Corp.*........................................................................... 708,750
45,000 RADCOM Ltd.*........................................................................... 348,750
60,000 Splash Technology Holdings, Inc.*...................................................... 1,920,000
------------
2,977,500
------------
COMPUTER SERVICES (1.0%)
80,000 CheckFree Corp.*....................................................................... 2,085,000
30,000 Data Systems Network Corp.*............................................................ 345,000
40,000 Procom Technology, Inc.*............................................................... 615,000
40,000 SPR Inc.*.............................................................................. 635,000
------------
3,680,000
------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
<PAGE>
DEAN WITTER CAPITAL APPRECIATION FUND
PORTFOLIO OF INVESTMENTS NOVEMBER 30, 1997, CONTINUED
<TABLE>
<CAPTION>
NUMBER OF
SHARES VALUE
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
COMPUTER SOFTWARE (9.5%)
25,000 Advantage Learning Systems, Inc.*...................................................... $ 568,750
60,000 Aladdin Knowledge Systems Ltd. (Israel)*............................................... 900,000
100,000 Borland International, Inc.*........................................................... 1,000,000
24,000 Box Hill Systems Corp.*................................................................ 280,500
50,000 Business Objects S.A. (ADR) (France)*.................................................. 537,500
100,000 Compuware Corp.*....................................................................... 3,493,750
80,000 CyberMedia, Inc.*...................................................................... 1,800,000
100,000 Data Dimensions, Inc.*................................................................. 1,806,250
50,000 DataMirror Corp. (Canada)*............................................................. 458,281
100,000 Digi International Inc.*............................................................... 1,937,500
60,000 Dr. Solomon's Group PLC (ADR) (United Kingdom)*........................................ 2,085,000
3,000 Great Plains Software, Inc.*........................................................... 67,500
50,000 International Microcomputer Software, Inc.*............................................ 787,500
60,000 INTERSOLV, Inc.*....................................................................... 956,250
50,000 InterVU Inc.*.......................................................................... 493,750
5,400 J.D. Edwards & Co.*.................................................................... 184,275
50,000 Kofax Image Products, Inc.*............................................................ 425,000
50,000 Landmark Systems Corp.*................................................................ 350,000
30,000 Learning Company, Inc.*................................................................ 543,750
50,000 LGS Group Inc. (Canada)................................................................ 570,656
40,000 MetaCreations Corp.*................................................................... 475,000
3,600 MMC Networks Inc.*..................................................................... 62,325
14,200 New Era of Networks, Inc.*............................................................. 181,050
40,000 Open Text Corp. (Canada)*.............................................................. 377,500
50,000 Oshap Technologies, Ltd. (Israel)*..................................................... 434,375
30,000 Pairgain Technologies, Inc.*........................................................... 706,875
30,000 Peregrine Systems, Inc.*............................................................... 356,250
20,000 Platinum Technology, Inc.*............................................................. 520,000
12,000 QAD Inc.*.............................................................................. 189,750
30,000 Rainbow Technologies, Inc.*............................................................ 720,000
25,000 RealNetworks, Inc.*.................................................................... 382,812
110,000 Sapiens International Corp. (Israel)*.................................................. 825,000
90,000 Simulation Sciences, Inc.*............................................................. 1,620,000
70,000 Symantec Corp.*........................................................................ 1,750,000
30,000 Symix Systems, Inc.*................................................................... 442,500
130,000 System Software Associates, Inc.*...................................................... 1,755,000
100,000 Systems & Computer Technology Corp.*................................................... 4,650,000
31,000 TSI International Software Ltd.*....................................................... 310,000
------------
35,004,649
------------
</TABLE>
<TABLE>
<CAPTION>
NUMBER OF
SHARES VALUE
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
COMPUTER SOFTWARE & SERVICES (8.6%)
80,000 Analysts International Corp............................................................ $ 3,780,000
30,000 CCC Information Services Group, Inc.*.................................................. 555,000
30,000 Certicom Corp. (Canada)*............................................................... 821,745
40,000 Check Point Software Technologies Ltd. (Israel)*....................................... 1,805,000
40,000 Cylink Corp.*.......................................................................... 440,000
30,000 Documentum, Inc.*...................................................................... 922,500
50,000 Edify Corp.*........................................................................... 837,500
45,000 Harbinger Corp.*....................................................................... 1,350,000
90,000 Hyperion Software Corp.*............................................................... 3,875,625
50,000 I2 Technologies, Inc.*................................................................. 2,256,250
30,000 IDT Corp.*............................................................................. 645,000
50,000 Infoseek Corp.*........................................................................ 553,125
30,000 JetForm Corp.*......................................................................... 459,375
50,000 Keane, Inc.*........................................................................... 1,584,375
80,000 Legato Systems, Inc.*.................................................................. 3,040,000
70,000 Lycos, Inc.*........................................................................... 2,135,000
50,000 Netopia, Inc.*......................................................................... 325,000
40,000 Olicom A/S (Denmark)*.................................................................. 1,147,500
60,000 PRI Automation, Inc.*.................................................................. 2,040,000
40,000 Secure Computing Corp.*................................................................ 475,000
90,000 Versant Object Technology Corp.*....................................................... 1,333,125
60,000 Xylan Corp.*........................................................................... 1,226,250
------------
31,607,370
------------
COMPUTERS (1.2%)
30,000 Lexmark International Group, Inc. (Class A)*........................................... 956,250
40,000 MICROS Systems, Inc.*.................................................................. 2,075,000
30,000 Network Appliance, Inc.*............................................................... 1,511,250
------------
4,542,500
------------
COMPUTERS - SYSTEMS (0.8%)
76,113 ATL Products, Inc.*.................................................................... 861,028
60,000 Tera Computer Co.*..................................................................... 900,000
60,000 Unisys Corp.*.......................................................................... 858,750
20,000 Video Lottery Technologies, Inc.*...................................................... 227,500
------------
2,847,278
------------
CONSUMER PRODUCTS (0.2%)
30,000 Consolidated Cigar Holdings Inc. (Class A)*............................................ 826,875
------------
CONSUMER SERVICES (1.1%)
60,000 AccuStaff, Inc.*....................................................................... 1,773,750
70,000 AmeriTrade Holding Corp. (Class A)*.................................................... 2,345,000
------------
4,118,750
------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
<PAGE>
DEAN WITTER CAPITAL APPRECIATION FUND
PORTFOLIO OF INVESTMENTS NOVEMBER 30, 1997, CONTINUED
<TABLE>
<CAPTION>
NUMBER OF
SHARES VALUE
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
DATA PROCESSING (0.4%)
20,000 Choicepoint Inc.*...................................................................... $ 701,250
100,000 Object Design, Inc.*................................................................... 937,500
------------
1,638,750
------------
DISTRIBUTION (0.5%)
5,800 JLK Direct Distribution Inc. (Class A)*................................................ 164,937
60,000 VWR Scientific Products Corp.*......................................................... 1,593,749
------------
1,758,686
------------
DRUGS (0.5%)
50,000 IDEC Pharmaceuticals Corp.*............................................................ 1,746,875
------------
EDUCATION (0.5%)
10,100 Bright Horizons, Inc.*................................................................. 156,550
82,700 Cornell Corrections, Inc.*............................................................. 1,447,250
13,000 Education Management Corp.*............................................................ 324,187
------------
1,927,987
------------
ELECTRONIC COMPONENTS (2.1%)
30,000 ATMI Inc.*............................................................................. 963,750
60,000 DII Group, Inc.*....................................................................... 1,342,500
40,000 DSP Communications, Inc.*.............................................................. 640,000
78,100 EFTC Corp.*............................................................................ 1,161,737
30,000 Exar Corp.*............................................................................ 746,250
19,600 FARO Technologies, Inc.*............................................................... 240,100
40,000 GenRad, Inc.*.......................................................................... 1,062,500
30,000 Ramtron International Corp.*........................................................... 193,125
60,000 Windmere-Durable Holdings Inc.......................................................... 1,447,500
------------
7,797,462
------------
ELECTRONICS (3.7%)
40,000 Aeroflex Inc.*......................................................................... 342,500
60,000 Analog Devices, Inc.*.................................................................. 1,882,500
19,000 Anaren Microwave, Inc.*................................................................ 380,000
110,000 Creative Technology Ltd. (Singapore)*.................................................. 2,928,750
30,000 DSP Group, Inc.*....................................................................... 975,000
40,000 Faroudja, Inc.*........................................................................ 275,000
20,000 Flextronics International, Ltd.*....................................................... 800,000
110,000 Kopin Corp.*........................................................................... 2,310,000
100,000 Odetics, Inc. (Class A)*............................................................... 662,500
8,700 OSI Systems, Inc.*..................................................................... 113,100
30,000 Ultratech Stepper, Inc.*............................................................... 731,250
50,000 Vitesse Semiconductor Corp.*........................................................... 2,225,000
------------
13,625,600
------------
</TABLE>
<TABLE>
<CAPTION>
NUMBER OF
SHARES VALUE
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ELECTRONICS & ELECTRICAL (0.3%)
35,000 Teradyne, Inc.*........................................................................ $ 1,148,437
------------
ELECTRONICS - SEMICONDUCTORS (0.7%)
90,000 MRV Communications, Inc.*.............................................................. 2,520,000
------------
ELECTRONICS - SEMICONDUCTORS/COMPONENTS (1.0%)
60,000 Kulicke & Soffa Industries, Inc.*...................................................... 1,653,750
60,000 Leitch Technology Corp. (Canada)*...................................................... 1,580,278
30,000 Supertex, Inc.*........................................................................ 367,500
------------
3,601,528
------------
ENERGY (0.6%)
30,000 Global Marine, Inc.*................................................................... 789,375
80,000 KTI, Inc.*............................................................................. 1,270,000
------------
2,059,375
------------
ENTERTAINMENT (0.0%)
9,600 N2K Inc.*.............................................................................. 177,600
------------
ENVIRONMENTAL (0.6%)
60,000 Allied Waste Industries, Inc.*......................................................... 1,308,750
90,000 ITEQ, Inc.*............................................................................ 1,057,500
------------
2,366,250
------------
ENVIRONMENTAL CONTROL (0.8%)
90,000 U.S.A Waste Services, Inc.*............................................................ 2,975,625
------------
EQUIPMENT (0.4%)
30,000 EVI, Inc.*............................................................................. 1,543,125
------------
FINANCE (0.5%)
50,000 Franchise Mortgage Acceptance Co.*..................................................... 875,000
76,500 New Century Financial Corp.*........................................................... 1,004,062
------------
1,879,062
------------
FINANCIAL SERVICES (0.2%)
30,000 Doral Financial Corp................................................................... 641,250
------------
FOOD PROCESSING (0.3%)
30,000 Smithfield Foods, Inc.*................................................................ 1,057,500
------------
FOODS (0.2%)
40,000 Foodmaker, Inc.*....................................................................... 620,000
------------
FURNITURE (0.2%)
25,900 Knoll, Inc.*........................................................................... 780,238
------------
HEALTH & PERSONAL CARE (0.5%)
109,000 Assisted Living Concepts, Inc.*........................................................ 1,866,625
------------
HEALTHCARE (0.2%)
60,000 Bone Care International, Inc.*......................................................... 600,000
------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
<PAGE>
DEAN WITTER CAPITAL APPRECIATION FUND
PORTFOLIO OF INVESTMENTS NOVEMBER 30, 1997, CONTINUED
<TABLE>
<CAPTION>
NUMBER OF
SHARES VALUE
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
HEALTHCARE - DIVERSIFIED (0.5%)
30,000 Healthsouth Corp.*..................................................................... $ 787,500
23,460 Paragon Health Network, Inc.*.......................................................... 1,216,988
------------
2,004,488
------------
HEALTHCARE - HMOs (0.2%)
60,000 Specialty Care Network, Inc.*.......................................................... 742,500
------------
HOME BUILDING (0.2%)
40,000 Kaufman & Broad Home Corp.............................................................. 867,500
------------
HOTELS/MOTELS (0.1%)
31,600 Execustay Corp.*....................................................................... 300,200
------------
HOUSEHOLD PRODUCTS (0.1%)
10,000 Dial Corp.............................................................................. 193,750
------------
INTERNET (0.4%)
18,000 Concentric Network Corp.*.............................................................. 180,000
30,000 Excite, Inc.*.......................................................................... 768,750
8,100 Network Solutions, Inc. (Class A)*..................................................... 128,588
35,000 Preview Travel, Inc.*.................................................................. 319,375
------------
1,396,713
------------
INVESTMENT COMPANIES (0.4%)
22,400 Affiliated Managers Group, Inc.*....................................................... 560,000
45,000 Consolidated Capital Corp.*............................................................ 922,500
------------
1,482,500
------------
LEISURE (1.1%)
40,000 American Coin Merchandising, Inc.*..................................................... 675,000
28,900 Brass Eagle Inc.*...................................................................... 334,156
30,000 Signature Resorts, Inc.*............................................................... 806,250
39,000 Silverleaf Resorts, Inc.*.............................................................. 809,250
34,500 Trendwest Resorts, Inc.*............................................................... 845,250
20,000 Vistana, Inc.*......................................................................... 440,000
------------
3,909,906
------------
MACHINERY (2.1%)
110,000 Chart Industries, Inc.................................................................. 2,543,750
40,000 MagneTek, Inc.*........................................................................ 835,000
140,000 National-Oilwell, Inc.*................................................................ 4,436,250
------------
7,815,000
------------
MACHINERY - DIVERSIFIED (0.3%)
50,400 Advanced Energy Industries, Inc.*...................................................... 989,100
------------
</TABLE>
<TABLE>
<CAPTION>
NUMBER OF
SHARES VALUE
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
MANUFACTURING (0.8%)
110,000 General Scanning, Inc.*................................................................ $ 2,860,000
------------
MANUFACTURING - DIVERSIFIED (0.5%)
30,000 Griffon Corp.*......................................................................... 466,875
30,000 Mettler-Toledo International Inc.*..................................................... 536,250
35,000 Middleby Corp.*........................................................................ 354,375
40,000 Safety Components International, Inc.*................................................. 540,000
------------
1,897,500
------------
MEDICAL PRODUCTS & SUPPLIES (1.1%)
30,000 Health Care & Retirement Corp.*........................................................ 1,181,250
100,000 Molecular Dynamics, Inc.*.............................................................. 2,012,500
60,000 Optical Coating Laboratory, Inc........................................................ 900,000
------------
4,093,750
------------
MEDICAL SERVICES (0.1%)
50,000 Medical Resources, Inc.*............................................................... 450,000
------------
METALS & MINING (0.0%)
1,000 BRO-X Minerals Ltd. (Canada)*.......................................................... 492
------------
METALS - MISCELLANEOUS (0.4%)
50,000 Handy & Harman......................................................................... 1,118,750
60,000 Recycling Industries, Inc.*............................................................ 465,000
------------
1,583,750
------------
METALS NON-FERROUS (0.5%)
90,000 Tubos de Acero de Mexico S.A. (ADR) (Mexico)*.......................................... 1,991,250
------------
MISCELLANEOUS (2.5%)
60,000 Brunswick Technologies, Inc.*.......................................................... 1,027,500
90,000 Mail-Well, Inc.*....................................................................... 2,936,250
120,000 Maverick Tube Corp.*................................................................... 3,427,500
70,000 Royal Group Technologies Ltd. (Canada)*................................................ 1,684,375
------------
9,075,625
------------
NATURAL GAS - EXPLORATION & PRODUCTION (0.7%)
120,000 Gulf Island Fabrication, Inc.*......................................................... 2,640,000
------------
OFFICE EQUIPMENT & SUPPLIES (0.1%)
30,000 Corporate Express, Inc.*............................................................... 468,750
------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
<PAGE>
DEAN WITTER CAPITAL APPRECIATION FUND
PORTFOLIO OF INVESTMENTS NOVEMBER 30, 1997, CONTINUED
<TABLE>
<CAPTION>
NUMBER OF
SHARES VALUE
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
OIL & GAS (4.8%)
17,700 Bayard Drilling Technologies, Inc.*.................................................... $ 325,238
90,000 Clayton Williams Energy, Inc.*......................................................... 1,417,500
60,000 Comstock Resources, Inc.*.............................................................. 787,500
30,000 Cross Timbers Oil Co................................................................... 695,625
30,000 Dailey International Inc.*............................................................. 333,750
15,000 Dawson Geophysical Co.*................................................................ 285,000
39,700 Gulf Indonesia Resources Ltd.*......................................................... 895,731
50,000 KCS Energy, Inc........................................................................ 1,187,500
45,000 Lomak Petroleum, Inc................................................................... 781,875
60,000 Mallon Resources Corp.*................................................................ 592,500
120,000 Noble Drilling Corp.*.................................................................. 3,607,500
100,000 Patterson Energy, Inc.*................................................................ 3,637,500
50,000 St. Mary Land & Exploration Co......................................................... 2,043,750
100,000 Unit Corp.*............................................................................ 1,093,750
------------
17,684,719
------------
OIL - DOMESTIC (0.2%)
30,000 Snyder Oil Corp........................................................................ 596,250
------------
OIL - EXPLORATION & PRODUCTION (0.1%)
15,000 Brown (TOM), Inc.*..................................................................... 328,125
------------
OIL EQUIPMENT & SERVICES (1.7%)
3,000 Dril-Quip, Inc.*....................................................................... 89,813
100,000 ENSCO International, Inc............................................................... 3,575,000
120,000 Global Industries Ltd.*................................................................ 1,920,000
22,100 IRI International Corp.*............................................................... 356,363
10,000 Wiser Oil Co........................................................................... 152,500
------------
6,093,676
------------
OIL REFINERIES (0.5%)
60,000 Valero Energy Corp..................................................................... 1,882,500
------------
OIL RELATED (0.4%)
35,000 Veritas DGC Inc.*...................................................................... 1,400,000
------------
OIL SERVICES (1.5%)
97,500 Core Laboratories N.V.*................................................................ 3,510,000
40,000 Friede Goldman International Inc.*..................................................... 1,187,500
25,000 Superior Energy Services, Inc.*........................................................ 262,500
20,000 UTI Energy Corp.*...................................................................... 560,000
------------
5,520,000
------------
OIL WELL EQUIPMENT & SERVICE (0.2%)
30,000 Key Energy Group, Inc.*................................................................ 729,375
------------
</TABLE>
<TABLE>
<CAPTION>
NUMBER OF
SHARES VALUE
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
PHARMACEUTICALS (2.3%)
100,000 Advance Paradigm, Inc.*................................................................ $ 2,962,500
5,000 Algos Pharmaceutical Corp.*............................................................ 127,500
30,000 Emisphere Technologies, Inc.*.......................................................... 603,750
40,000 MedImmune, Inc.*....................................................................... 1,517,500
30,000 PathoGenesis Corp.*.................................................................... 1,065,000
60,000 SangStat Medical Corp.*................................................................ 2,055,000
------------
8,331,250
------------
POLLUTION CONTROL (0.8%)
80,000 American Disposal Services, Inc.*...................................................... 2,820,000
------------
PROPERTY - CASUALTY INSURANCE (0.4%)
5,000 Penn-America Group, Inc................................................................ 91,250
30,000 Stewart Information Services Corp...................................................... 811,875
30,000 Symons International Group, Inc.*...................................................... 558,750
------------
1,461,875
------------
PUBLISHING (1.0%)
9,200 CMP Media Inc. (Class A)*.............................................................. 169,050
5,000 Petersen Companies, Inc. (Class A)*.................................................... 90,000
30,000 Thomson Corp. (Canada)................................................................. 759,587
90,000 Valassis Communications, Inc.*......................................................... 2,705,625
------------
3,724,262
------------
REAL ESTATE (0.3%)
50,000 Catellus Development Corp.*............................................................ 925,000
2,000 LaSalle Partners, Inc.*................................................................ 69,375
------------
994,375
------------
REAL ESTATE INVESTMENT TRUST (0.2%)
40,000 Laser Mortgage Management, Inc......................................................... 590,000
------------
RESTAURANTS (0.1%)
28,000 Star Buffet, Inc.*..................................................................... 364,000
------------
RETAIL (2.7%)
19,900 A. C. Moore Arts & Crafts, Inc.*....................................................... 296,013
30,000 Abercrombie & Fitch Co. (Class A)*..................................................... 898,125
60,000 Claire's Stores, Inc................................................................... 1,357,500
60,000 Fred's, Inc............................................................................ 1,462,500
80,000 Michaels Stores, Inc.*................................................................. 2,565,000
60,000 ONSALE, Inc.*.......................................................................... 1,053,750
60,000 Ross Stores, Inc....................................................................... 2,340,000
------------
9,972,888
------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
<PAGE>
DEAN WITTER CAPITAL APPRECIATION FUND
PORTFOLIO OF INVESTMENTS NOVEMBER 30, 1997, CONTINUED
<TABLE>
<CAPTION>
NUMBER OF
SHARES VALUE
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
RETAIL - DEPARTMENT STORES (1.8%)
75,000 Dollar General Corp.................................................................... $ 2,821,875
60,000 Payless ShoeSource, Inc.*.............................................................. 3,810,000
------------
6,631,875
------------
RETAIL - SPECIALTY (0.8%)
100,000 Braun's Fashions Corp.*................................................................ 950,000
60,000 TJX Companies, Inc..................................................................... 2,070,000
------------
3,020,000
------------
RETAIL - SPECIALTY APPAREL (0.6%)
60,000 Dress Barn, Inc.*...................................................................... 1,545,000
30,000 Vans, Inc.*............................................................................ 481,875
------------
2,026,875
------------
SEMICONDUCTORS (1.1%)
50,000 Integrated Circuit Systems, Inc.*...................................................... 1,400,000
60,000 KLA-Tencor Corp.*...................................................................... 2,317,500
55,000 Plasma-Therm, Inc.*.................................................................... 460,625
------------
4,178,125
------------
SPECIALIZED SERVICES (1.4%)
10,800 Pegasus Systems, Inc.*................................................................. 190,350
30,000 RCM Technologies, Inc.*................................................................ 468,750
3,900 Securacom, Inc.*....................................................................... 40,463
30,000 Select Appointments Holdings Public Limited Co. (ADR) (United Kingdom)................. 577,500
50,000 SOS Staffing Services, Inc.*........................................................... 1,025,000
45,000 Source Services Corp.*................................................................. 922,500
30,000 Todd-AO Corp. (Class A)................................................................ 292,500
8,200 TransCoastal Marine Services, Inc.*.................................................... 159,900
70,000 Transcrypt International, Inc.*........................................................ 1,636,250
------------
5,313,213
------------
STEEL (0.8%)
30,000 Lone Star Technologies, Inc.*.......................................................... 870,000
60,000 Northwest Pipe Co.*.................................................................... 1,357,500
30,000 NS Group, Inc.*........................................................................ 562,500
------------
2,790,000
------------
TECHNOLOGY (1.7%)
40,000 Aerial Communications, Inc.*........................................................... 355,000
60,000 Brilliant Digital Entertainment, Inc.*................................................. 360,000
60,000 CIENA Corp.*........................................................................... 3,251,250
60,000 Kuhlman Corp........................................................................... 2,118,750
3,600 LHS Group, Inc.*....................................................................... 151,200
------------
6,236,200
------------
</TABLE>
<TABLE>
<CAPTION>
NUMBER OF
SHARES VALUE
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
TECHNOLOGY RELATED (0.5%)
130,000 Graham-Field Health Products, Inc.*.................................................... $ 1,941,875
------------
TELECOMMUNICATIONS (4.4%)
50,000 ARC International Corp.*............................................................... 290,625
70,000 CGI Group, Inc. (Canada)*.............................................................. 1,976,401
30,000 CTC Communications Corp.*.............................................................. 442,500
30,000 Globalstar Telecommunications Ltd.*.................................................... 1,486,875
110,000 Inter-Tel Corp......................................................................... 2,310,000
30,000 Norstan, Inc.*......................................................................... 712,500
60,000 Orckit Communications Ltd. (Israel)*................................................... 1,230,000
20,000 PageMart Wireless, Inc.*............................................................... 197,500
19,100 Qwest Communications International Inc.*............................................... 1,040,950
30,000 STAR Telecommunications, Inc.*......................................................... 858,750
40,000 Tel-Save Holdings, Inc.*............................................................... 862,500
90,000 Winstar Communications, Inc.*.......................................................... 2,379,375
100,000 World Access, Inc.*.................................................................... 2,425,000
------------
16,212,976
------------
TELECOMMUNICATIONS EQUIPMENT (4.5%)
30,000 ACE COMM Corp.*........................................................................ 495,000
90,000 Applied Signal Technology, Inc.*....................................................... 1,350,000
40,000 Associated Group, Inc. - Class B*...................................................... 1,250,000
50,000 Boston Communications Group, Inc.*..................................................... 462,500
30,000 Communications Systems, Inc............................................................ 540,000
100,000 Davox Corp.*........................................................................... 3,225,000
180,000 Digital Microwave Corp.*............................................................... 2,835,000
2,000 Excel Switching Corp.*................................................................. 48,250
60,000 Mitec Telecom Inc. (Canada)*........................................................... 326,591
70,000 NICE-Systems Ltd. (ADR) (Israel)*...................................................... 3,062,500
30,000 Ortel Corp.*........................................................................... 528,750
110,000 RIT Technologies Ltd.*................................................................. 1,086,250
30,000 ViaSat, Inc.*.......................................................................... 457,500
30,000 Yurie Systems, Inc.*................................................................... 742,500
------------
16,409,841
------------
TEMPORARY SERVICES (0.5%)
80,000 Labor Ready Inc.*...................................................................... 1,780,000
------------
TRANSPORTATION (3.7%)
75,000 Air Express International Corp......................................................... 2,151,563
60,000 Alaska Air Group, Inc.*................................................................ 2,242,500
50,000 American Classic Voyages Co.*.......................................................... 850,000
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
<PAGE>
DEAN WITTER CAPITAL APPRECIATION FUND
PORTFOLIO OF INVESTMENTS NOVEMBER 30, 1997, CONTINUED
<TABLE>
<CAPTION>
NUMBER OF
SHARES VALUE
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
44,700 Budget Group, Inc. (Class A)*.......................................................... $ 1,586,850
30,000 Coach USA, Inc.*....................................................................... 836,250
70,000 Consolidated Freightways Corp.*........................................................ 1,093,750
11,600 Jevic Transportation, Inc.*............................................................ 189,950
70,000 Offshore Logistics, Inc.*.............................................................. 1,601,250
120,000 Transat A.T., Inc. (Canada)*........................................................... 1,011,378
45,000 Trico Marine Service, Inc.*............................................................ 1,254,375
10,000 Virgin Express Holdings PLC - SP (ADR) (United Kingdom)*............................... 165,000
30,000 Werner Enterprises, Inc................................................................ 641,250
------------
13,624,116
------------
TRANSPORTATION - SHIPPING (0.4%)
30,000 Gulfmark Offshore Inc.*................................................................ 1,005,000
50,000 OMI Corp.*............................................................................. 512,500
------------
1,517,500
------------
TRUCKERS (0.5%)
40,000 CNF Transportation Inc................................................................. 1,740,000
------------
WASTE DISPOSAL (0.5%)
80,000 Eastern Environmental Services, Inc.*.................................................. 1,880,000
------------
WHOLESALE DISTRIBUTOR (0.6%)
60,000 Brightpoint, Inc.*..................................................................... 963,750
50,000 CellStar Corp.*........................................................................ 1,293,750
------------
2,257,500
------------
WIRELESS COMMUNICATION (0.1%)
30,000 Metro One Telecommunications*.......................................................... 247,500
------------
TOTAL COMMON STOCKS
(IDENTIFIED COST $320,804,094)......................................................... 367,982,907
------------
PREFERRED STOCK (0.0%)
MEDICAL PRODUCTS & SUPPLIES
30,000 Fresenius National Medical Care (Class D) (Germany) (Identified Cost $6,069)*.......... 1,950
------------
</TABLE>
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT IN
THOUSANDS VALUE
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
SHORT-TERM INVESTMENT (a) (0.7%)
REPURCHASE AGREEMENT
$ 2,447 The Bank of New York 5.375% due 12/01/97 (dated 11/28/97; proceeds $2,447,971)
(IDENTIFIED COST $2,446,890)......................................................... $ 2,446,890
------------
TOTAL INVESTMENTS
(IDENTIFIED COST $323,257,053) (B)........................................................ 100.9 % 370,431,747
LIABILITIES IN EXCESS OF CASH AND OTHER ASSETS............................................ (0.9) (3,179,883)
------ -------------
NET ASSETS................................................................................ 100.0 % $ 367,251,864
===== =============
</TABLE>
- ---------------------
ADR American Depository Receipt.
* Non-income producing security.
(a) Collateralized by $842,747 Government National Mortgage Association 7.00%
due 09/20/24 valued at $519,347 and $1,843,626 Government National Mortgage
Association 9.00% due 11/15/27 valued at $1,976,481.
(b) The aggregate cost for federal income tax purposes approximates identified
cost. The aggregate gross unrealized appreciation is $62,429,313 and the
aggregate gross unrealized depreciation is $15,254,619, resulting in net
unrealized appreciation of $47,174,694.
SEE NOTES TO FINANCIAL STATEMENTS
<PAGE>
DEAN WITTER CAPITAL APPRECIATION FUND
FINANCIAL STATEMENTS
STATEMENT OF ASSETS AND LIABILITIES
NOVEMBER 30, 1997
<TABLE>
<CAPTION>
ASSETS:
<S> <C>
Investments in securities, at value
(identified cost $323,257,053).............................................................. $370,431,747
Cash.......................................................................................... 3,740
Receivable for:
Investments sold.......................................................................... 3,064,024
Shares of beneficial interest sold........................................................ 370,989
Dividends................................................................................. 28,770
Deferred organizational expenses.............................................................. 103,962
Prepaid expenses.............................................................................. 86,388
------------
TOTAL ASSETS............................................................................. 374,089,620
------------
LIABILITIES:
Payable for:
Investments purchased..................................................................... 6,181,443
Plan of distribution fee.................................................................. 312,445
Investment management fee................................................................. 234,571
Shares of beneficial interest repurchased................................................. 31,535
Accrued expenses.............................................................................. 77,762
------------
TOTAL LIABILITIES........................................................................ 6,837,756
------------
NET ASSETS............................................................................... $367,251,864
============
COMPOSITION OF NET ASSETS:
Paid-in-capital............................................................................... $298,208,563
Net unrealized appreciation................................................................... 47,174,694
Accumulated undistributed net realized gain................................................... 21,868,607
------------
NET ASSETS............................................................................... $367,251,864
============
CLASS A SHARES:
Net Assets.................................................................................... $344,785
Shares Outstanding (UNLIMITED AUTHORIZED, $.01 PAR VALUE)..................................... 24,184
NET ASSET VALUE PER SHARE................................................................ $14.26
============
MAXIMUM OFFERING PRICE PER SHARE
(NET ASSET VALUE PLUS 5.54% OF NET ASSET VALUE)........................................ $15.05
============
CLASS B SHARES:
Net Assets.................................................................................... $365,483,520
Shares Outstanding (UNLIMITED AUTHORIZED, $.01 PAR VALUE)..................................... 25,703,352
NET ASSET VALUE PER SHARE................................................................ $14.22
============
CLASS C SHARES:
Net Assets.................................................................................... $1,287,861
Shares Outstanding (UNLIMITED AUTHORIZED, $.01 PAR VALUE)..................................... 90,559
NET ASSET VALUE PER SHARE................................................................ $14.22
============
CLASS D SHARES:
Net Assets.................................................................................... $135,698
Shares Outstanding (UNLIMITED AUTHORIZED, $.01 PAR VALUE)..................................... 9,511
NET ASSET VALUE PER SHARE................................................................ $14.27
============
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
<PAGE>
DEAN WITTER CAPITAL APPRECIATION FUND
FINANCIAL STATEMENTS, CONTINUED
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED NOVEMBER 30, 1997*
NET INVESTMENT INCOME:
<TABLE>
<CAPTION>
INCOME
<S> <C>
Dividends (net of $3,705 foreign withholding tax).............................................. $ 505,611
Interest....................................................................................... 215,588
-----------
TOTAL INCOME.............................................................................. 721,199
-----------
EXPENSES
Plan of distribution fee (Class A shares)...................................................... 197
Plan of distribution fee (Class B shares)...................................................... 3,434,993
Plan of distribution fee (Class C shares)...................................................... 2,400
Investment management fee...................................................................... 2,578,896
Transfer agent fees and expenses............................................................... 559,409
Registration fees.............................................................................. 70,436
Shareholder reports and notices................................................................ 67,583
Custodian fees................................................................................. 56,761
Professional fees.............................................................................. 51,873
Organizational expenses........................................................................ 35,763
Trustees' fees and expenses.................................................................... 9,206
Other.......................................................................................... 6,743
-----------
TOTAL EXPENSES............................................................................ 6,874,260
-----------
NET INVESTMENT LOSS....................................................................... (6,153,061)
-----------
NET REALIZED AND UNREALIZED GAIN (LOSS):
Net realized gain.............................................................................. 38,570,804
Net change in unrealized appreciation.......................................................... (6,517,638)
-----------
NET GAIN.................................................................................. 32,053,166
-----------
NET INCREASE................................................................................... $25,900,105
===========
</TABLE>
- ---------------------
* Class A, Class C and Class D shares were issued July 28, 1997.
SEE NOTES TO FINANCIAL STATEMENTS
<PAGE>
DEAN WITTER CAPITAL APPRECIATION FUND
FINANCIAL STATEMENTS, CONTINUED
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
FOR THE YEAR FOR THE YEAR
ENDED ENDED
NOVEMBER 30, NOVEMBER 30,
1997* 1996
- -----------------------------------------------------------------------------------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
OPERATIONS:
Net investment loss..................................... $ (6,153,061) $ (3,677,495)
Net realized gain (loss)................................ 38,570,804 (16,624,523)
Net change in unrealized appreciation................... (6,517,638) 48,698,318
------------- -------------
NET INCREASE....................................... 25,900,105 28,396,300
Net increase from transactions in shares of beneficial
interest.............................................. 30,542,778 180,404,150
------------- -------------
NET INCREASE....................................... 56,442,883 208,800,450
NET ASSETS:
Beginning of period..................................... 310,808,981 102,008,531
------------- -------------
END OF PERIOD...................................... $ 367,251,864 $ 310,808,981
============= =============
</TABLE>
- ---------------------
* Class A, Class C and Class D shares were issued July 28, 1997.
SEE NOTES TO FINANCIAL STATEMENTS
<PAGE>
DEAN WITTER CAPITAL APPRECIATION FUND
NOTES TO FINANCIAL STATEMENTS NOVEMBER 30, 1997
1. ORGANIZATION AND ACCOUNTING POLICIES
Dean Witter Capital Appreciation 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
long-term capital appreciation. The Fund was organized as a Massachusetts
business trust on July 31, 1995 and commenced operations on October 27, 1995. On
July 28, 1997, the Fund commenced offering three additional classes of shares,
with the then current shares designated as Class B shares.
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, 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 (in
cases where securities are traded on more than one exchange, the securities are
valued on the exchange designated as the primary market pursuant to procedures
adopted by the Trustees); (2) all other portfolio securities for which
over-the-counter market quotations are readily available are valued at the
latest 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 Dean Witter InterCapital Inc. (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 having a maturity date of
more than sixty
<PAGE>
DEAN WITTER CAPITAL APPRECIATION FUND
NOTES TO FINANCIAL STATEMENTS NOVEMBER 30, 1997, CONTINUED
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
except for certain dividends on foreign securities which are recorded as soon as
the Fund is informed after 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. ORGANIZATIONAL EXPENSES -- The Investment Manager paid the organizational
expenses of the Fund in the amount of approximately $179,000 and was reimbursed
for the full amount thereof. Such expenses have been deferred and are being
amortized on the straight-line method over a period not to exceed five years
from the commencement of operations.
<PAGE>
DEAN WITTER CAPITAL APPRECIATION FUND
NOTES TO FINANCIAL STATEMENTS NOVEMBER 30, 1997, CONTINUED
2. INVESTMENT MANAGEMENT AGREEMENT
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 0.75% to the net assets of the Fund determined as of the close of
each business day. Effective May 1, 1997, the Agreement was amended to reduce
the annual fee to 0.725% to the portion of daily net assets exceeding $500
million.
Under the terms of the Agreement, in addition to managing the Fund's
investments, the Investment Manager maintains certain of the Fund's books and
records and furnishes, at its own expense, office space, facilities, equipment,
clerical, bookkeeping and certain legal services and pays the salaries of all
personnel, including officers of the Fund who are employees of the Investment
Manager. The Investment Manager also bears the cost of telephone services, heat,
light, power and other utilities provided to the Fund.
3. PLAN OF DISTRIBUTION
Shares of the Fund are distributed by Dean Witter Distributors Inc. (the
"Distributor"), an affiliate of the Manager. The Fund has adopted a Plan of
Distribution (the "Plan") pursuant to Rule 12b-1 under the Act. The Plan
provides that the Fund will pay the Distributor a fee which is accrued daily and
paid monthly at the following annual rates: (i) Class A -- up to 0.25% of the
average daily net assets of Class A; (ii) Class B -- 1.0% of the lesser of: (a)
the average daily aggregate gross sales of the Class B shares since inception of
the Fund (not including reinvestment of dividend or capital gain distributions)
less the average net asset value of the Class B shares redeemed since the Fund's
inception upon which a contingent deferred sales charge has been imposed or
waived; or (b) the average daily net assets of Class B; and (iii) Class C -- up
to 1.0% of the average daily net assets of Class C. In the case of Class A
shares, amounts paid under the Plan are paid to the Distributor for services
provided. In the case of Class B and Class C shares, amounts paid under the Plan
are paid to the Distributor for services provided and the expenses borne by it
and others in the distribution of the shares of these Classes, including the
payment of commissions for sales of these Classes and incentive compensation to,
and expenses of, the account executives of Dean Witter Reynolds Inc. ("DWR"), an
affiliate of the Investment Manager and Distributor, and others who engage in or
support distribution of the shares or who service shareholder accounts,
including overhead and telephone expenses; printing and distribution of
prospectuses and reports used in connection with the offering of these shares to
other than current shareholders; and preparation, printing and distribution of
sales literature and advertising materials. In addition, the Distributor may
utilize fees
<PAGE>
DEAN WITTER CAPITAL APPRECIATION FUND
NOTES TO FINANCIAL STATEMENTS NOVEMBER 30, 1997, CONTINUED
paid pursuant to the Plan, in the case of Class B shares, to compensate DWR and
other selected broker-dealers for their opportunity costs in advancing such
amounts, which compensation would be in the form of a carrying charge on any
unreimbursed expenses.
In the case of Class B shares, 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, including
carrying charges, totaled $12,299,293 at November 30, 1997.
In the case of Class A shares and Class C shares, expenses incurred pursuant to
the Plan in any calendar year in excess of 0.25% or 1.0% of the average daily
net assets of Class A or Class C, respectively, will not be reimbursed by the
Fund through payments in any subsequent year, except that expenses representing
a gross sales credit to account executives may be reimbursed in the subsequent
calendar year. For the period ended November 30, 1997, 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 period ended November 30,
1997, it received contingent deferred sales charges from certain redemptions of
the Fund's Class B shares and Class C shares of $983,855 and $653, respectively
and received $11,990 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 November 30, 1997 aggregated
$648,955,963 and $623,441,813, respectively.
For the year ended November 30, 1997, the Fund incurred brokerage commissions of
$29,900 with DWR for portfolio transactions executed on behalf of the fund.
For the period May 31, 1997 through November 30, 1997, the Fund incurred
brokerage commissions of $6,250 with Morgan Stanley & Co., Inc., an affiliate of
the Investment Manager since May 31, 1997, for portfolio transactions executed
on behalf of the Fund.
<PAGE>
DEAN WITTER CAPITAL APPRECIATION FUND
NOTES TO FINANCIAL STATEMENTS NOVEMBER 30, 1997, CONTINUED
Dean Witter Trust FSB, an affiliate of the Investment Manager and Distributor,
is the Fund's transfer agent. At November 30, 1997, the Fund had transfer agent
fees and expenses payable of approximately $4,600.
5. SHARES OF BENEFICIAL INTEREST
Transactions in shares of beneficial interest were as follows:
<TABLE>
<CAPTION>
FOR THE YEAR FOR THE YEAR
ENDED ENDED
NOVEMBER 30, 1997 NOVEMBER 30, 1996
---------------------------- --------------------------
SHARES AMOUNT SHARES AMOUNT
----------- -------------- ----------- ------------
<S> <C> <C> <C> <C>
CLASS A SHARES*
Sold............................................................. 24,829 $ 380,181 -- --
Repurchased...................................................... (645) (9,645) -- --
----------- -------------- ----------- ------------
Net increase -- Class A.......................................... 24,184 370,536 -- --
----------- -------------- ----------- ------------
CLASS B SHARES
Sold............................................................. 15,086,938 211,255,509 20,783,480 $262,842,130
Repurchased...................................................... (13,313,433) (182,682,535) (6,542,161) (82,437,980)
----------- -------------- ----------- ------------
Net increase -- Class B.......................................... 1,773,505 28,572,974 14,241,319 180,404,150
----------- -------------- ----------- ------------
CLASS C SHARES*
Sold............................................................. 101,030 1,609,066 -- --
Repurchased...................................................... (10,471) (153,924) -- --
----------- -------------- ----------- ------------
Net increase -- Class C.......................................... 90,559 1,455,142 -- --
----------- -------------- ----------- ------------
CLASS D SHARES*
Sold............................................................. 9,511 144,126 -- --
----------- -------------- ----------- ------------
Net increase in Fund............................................. 1,897,759 $ 30,542,778 14,241,319 $180,404,150
=========== ============== =========== ============
</TABLE>
- ---------------------
* For the period July 28, 1997 (issue date) through November 30, 1997.
6. FEDERAL INCOME TAX STATUS
During the year ended November 30, 1997, the Fund utilized its net capital loss
carryover of approximately $15,684,000.
As of November 30, 1997, the Fund had temporary book/tax differences
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, paid-in-capital was
charged $6,136,407, accumulated undistributed net realized gain was charged
$16,654 and net investment loss was credited $6,153,061.
<PAGE>
DEAN WITTER CAPITAL APPRECIATION FUND
FINANCIAL HIGHLIGHTS
Selected ratios and per share data for a share of beneficial interest
outstanding throughout each period:
<TABLE>
<CAPTION>
FOR THE
PERIOD
OCTOBER 27,
FOR THE YEAR FOR THE YEAR 1995*
ENDED ENDED THROUGH
NOVEMBER 30, NOVEMBER 30, NOVEMBER 30,
1997**++ 1996 1995
- --------------------------------------------------------------------
<S> <C> <C> <C>
CLASS B SHARES
PER SHARE OPERATING
PERFORMANCE:
Net asset value,
beginning of period..... $ 12.99 $ 10.53 $ 10.00
------ ------ ------
Net investment loss...... (0.24) (0.15) (0.01)
Net realized and
unrealized gain......... 1.47 2.61 0.54
------ ------ ------
Total from investment
operations.............. 1.23 2.46 0.53
------ ------ ------
Net asset value, end of
period.................. $ 14.22 $ 12.99 $ 10.53
====== ====== ======
TOTAL INVESTMENT
RETURN+.................. 9.47% 23.36% 5.30%(1)
RATIOS TO AVERAGE NET
ASSETS:
Expenses................. 2.00% 2.00% 2.87%(2)
Net investment loss...... (1.79)% (1.72)% (0.79)%(2)
SUPPLEMENTAL DATA:
Net assets, end of
period, in thousands.... $365,484 $310,809 $102,009
Portfolio turnover
rate.................... 184% 108% 7%(1)
Average commission rate
paid.................... $0.0570 $0.0570 --
</TABLE>
- --------------------
* Commencement of operations.
** Prior to July 28, 1997, the Fund issued one class of shares. All shares of
the Fund held prior to that date have been designated Class B shares.
++ 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.
SEE NOTES TO FINANCIAL STATEMENTS
<PAGE>
DEAN WITTER CAPITAL APPRECIATION FUND
FINANCIAL HIGHLIGHTS, CONTINUED
<TABLE>
<CAPTION>
FOR THE PERIOD
JULY 28, 1997 *
THROUGH
NOVEMBER 30,
1997++
- ----------------------------------------------------------------------------------------
<S> <C>
CLASS A SHARES
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period.................................. $ 14.34
------
Net investment loss................................................... (0.06)
Net realized and unrealized loss...................................... (0.02)
------
Total from investment operations...................................... (0.08)
------
Net asset value, end of period........................................ $ 14.26
======
TOTAL INVESTMENT RETURN+.............................................. (0.56)%(1)
RATIOS TO AVERAGE NET ASSETS:
Expenses.............................................................. 1.27%(2)
Net investment loss................................................... (1.08)%(2)
SUPPLEMENTAL DATA:
Net assets, end of period, in thousands............................... $345
Portfolio turnover rate............................................... 184%(1)
Average commission rate paid.......................................... $0.0570
CLASS C SHARES
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period.................................. $ 14.34
------
Net investment loss................................................... (0.09)
Net realized and unrealized loss...................................... (0.03)
------
Total from investment operations...................................... (0.12)
------
Net asset value, end of period........................................ $ 14.22
======
TOTAL INVESTMENT RETURN+.............................................. (0.84)%(1)
RATIOS TO AVERAGE NET ASSETS:
Expenses.............................................................. 2.03%(2)
Net investment loss................................................... (1.82)%(2)
SUPPLEMENTAL DATA:
Net assets, end of period, in thousands............................... $1,288
Portfolio turnover rate............................................... 184%(1)
Average commission rate paid.......................................... $0.0570
</TABLE>
- ---------------------
* The date shares were first issued.
++ 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.
SEE NOTES TO FINANCIAL STATEMENTS
<PAGE>
DEAN WITTER CAPITAL APPRECIATION FUND
FINANCIAL HIGHLIGHTS, CONTINUED
<TABLE>
<CAPTION>
FOR THE PERIOD
JULY 28, 1997*
THROUGH
NOVEMBER 30,
1997++
- ----------------------------------------------------------------------------------------
<S> <C>
CLASS D SHARES
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period.................................. $ 14.34
------
Net investment loss................................................... (0.04)
Net realized and unrealized loss...................................... (0.03)
------
Total from investment operations...................................... (0.07)
------
Net asset value, end of period........................................ $ 14.27
======
TOTAL INVESTMENT RETURN+.............................................. (0.49)%(1)
RATIOS TO AVERAGE NET ASSETS:
Expenses.............................................................. 1.01%(2)
Net investment loss................................................... (0.82)%(2)
SUPPLEMENTAL DATA:
Net assets, end of period, in thousands............................... $136
Portfolio turnover rate............................................... 184%(1)
Average commission rate paid.......................................... $0.0570
</TABLE>
- ---------------------
* The date shares were first issued.
++ 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.
SEE NOTES TO FINANCIAL STATEMENTS
<PAGE>
DEAN WITTER CAPITAL APPRECIATION FUND
REPORT OF INDEPENDENT ACCOUNTANTS
TO THE SHAREHOLDERS AND TRUSTEES
OF DEAN WITTER CAPITAL APPRECIATION 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 Dean Witter Capital Appreciation
Fund (the "Fund") at November 30, 1997, the results of its operations for the
year then ended, the changes in its net assets for each of the two years in the
period then ended and the financial highlights for each of the periods
presented, in conformity with generally accepted accounting principles. These
financial statements and financial highlights (hereafter referred to as
"financial statements") are the responsibility of the Fund's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these financial statements in accordance
with generally accepted auditing standards which require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audits, which included confirmation of securities at
November 30, 1997 by correspondence with the custodian and brokers and the
application of alternative auditing procedures where confirmations from brokers
were not received, provide a reasonable basis for the opinion expressed above.
PRICE WATERHOUSE LLP
1177 AVENUE OF THE AMERICAS
NEW YORK, NEW YORK 10036
JANUARY 14, 1998
<PAGE>
MORGAN STANLEY DEAN WITTER CAPITAL APPRECIATION FUND
LETTER TO THE SHAREHOLDERS MAY 31, 1998
TWO WORLD TRADE CENTER, NEW YORK, NEW YORK 10048
DEAR SHAREHOLDER:
The Asian financial crisis continued to impact many of the Fund's holdings,
especially small- and mid-cap stocks, technology issues and companies that deal
with commodities. Small- and mid-cap companies were the first to be impacted by
the Asian turmoil as investors sought safety in these larger, more liquid and
thought-to-be safer names. Many technology stocks were also negatively impacted,
particularly component companies, as concerns over excess inventories and
slowing demand caused prices to erode. Commodity prices, particularly oil, also
experienced downward pressure due to a combination of the economic slowdown in
Asia and the warmer-than-expected winter across most of North America. This
decline in prices has, in turn, negatively affected many oil service and
drilling stocks.
PERFORMANCE AND PORTFOLIO
For the first half of the fiscal year ended May 31, 1998 the Fund's Class B
shares produced a total return of -0.61 percent versus 15.05 percent for the
Standard & Poor's 500 Composite Stock Price Index (S&P 500) and 9.08 percent for
the Lipper Capital Appreciation Funds Average. For the same period, the Fund's
Class A, C and D shares had total returns of -0.25 percent, -0.62 percent and
- -0.11 percent, respectively. The performance of the Fund's four share classes
varies because of differing expenses.
The Fund's underperformance relative to the S&P 500 and its Lipper universe is
due to the fact that the Fund has been overweighted relative to these benchmarks
in small-cap stocks while, during the period under review, large-cap stocks
significantly outperformed. However, we continue to believe that the small-cap
segment of the market remains undervalued and that, over the long term, this
segment offers greater growth potential than the broader market. Accordingly,
the Fund continues to pursue small-cap stocks in the $5 to $25 price range with
sound fundamentals, solid earnings momentum and financial stability while
maintaining broad diversification across industry groups. The top
<PAGE>
MORGAN STANLEY DEAN WITTER CAPITAL APPRECIATION FUND
LETTER TO THE SHAREHOLDERS MAY 31, 1998, CONTINUED
five industries represented in the portfolio on May 31, 1998 were technology
(37.3 percent of net assets), consumer cyclicals (17.7 percent), capital goods
(10.2 percent), energy (8 percent) and health care (7.3 percent). While the
technology industry has been particularly impacted by the Asian crisis, we
remain heavily concentrated there because we believe there is good value in this
sector among small- and mid-cap software names that operate within niche
markets.
LOOKING AHEAD
We believe that small- and mid-cap stocks stand to benefit from the current
environment of stable interest rates, moderate economic growth and a strong U.S.
dollar. Although the Asian financial crisis initially caused investors to
gravitate toward large caps that were perceived to be safer during the resulting
market uncertainty in the United States, small- and mid-cap stocks actually have
less global exposure and should, therefore, provide investors with a greater
defense against any continued turmoil in the Pacific Rim.
We appreciate your support of Morgan Stanley Dean Witter Capital Appreciation
Fund and look forward to continuing to serve your investment needs.
Sincerely,
[SIGNATURE]
CHARLES A. FIUMEFREDDO
CHAIRMAN OF THE BOARD
2
<PAGE>
MORGAN STANLEY DEAN WITTER CAPITAL APPRECIATION FUND
PORTFOLIO OF INVESTMENTS MAY 31, 1998 (UNAUDITED)
<TABLE>
<CAPTION>
NUMBER OF
SHARES VALUE
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
COMMON STOCKS (94.7%)
ADVERTISING (0.3%)
20,000 Snyder Communications, Inc.*........................................................... $ 806,250
------------
AEROSPACE & DEFENSE (1.2%)
30,000 Kellstrom Industries, Inc.*............................................................ 832,500
70,000 Orbital Sciences Corp.*................................................................ 2,861,250
------------
3,693,750
------------
AIRLINES (0.4%)
40,000 America West Holdings Corp. (Class B)*................................................. 1,132,500
------------
APPAREL (0.6%)
30,000 Polo Ralph Lauren Corp.*............................................................... 915,000
50,000 Quiksilver, Inc.*...................................................................... 953,125
------------
1,868,125
------------
BANKS (1.0%)
30,000 Bank of Commerce....................................................................... 536,250
60,000 Flagstar Bancorp....................................................................... 1,432,500
20,000 Zions Bancorporation................................................................... 1,027,500
------------
2,996,250
------------
BIOTECHNOLOGY (0.8%)
60,000 Sepracor, Inc.*........................................................................ 2,580,000
------------
BREWERY (0.1%)
30,000 Boston Beer Company, Inc. (Class A)*................................................... 330,000
------------
BROADCASTING (0.4%)
20,000 Chancellor Media Corp.*................................................................ 835,000
30,000 Source Media, Inc.*.................................................................... 438,750
------------
1,273,750
------------
BROKERAGE (0.3%)
60,000 Freedom Securities Corp.*.............................................................. 1,035,000
------------
BUILDING & CONSTRUCTION (0.5%)
50,000 Dycom Industries, Inc.*................................................................ 1,431,250
------------
CABLE TELEVISION EQUIPMENT (0.3%)
30,000 Century Communications Corp.*.......................................................... 476,250
30,000 Harmonic Lightwaves, Inc.*............................................................. 521,250
------------
997,500
------------
COMMERCIAL SERVICES (3.1%)
150,000 Century Business Sevices, Inc.*........................................................ 2,578,125
75,000 International Telecommunication Data Systems, Inc.*.................................... 1,846,875
55,000 International Total Services, Inc.*.................................................... 1,127,500
<CAPTION>
NUMBER OF
SHARES VALUE
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
50,000 Lason, Inc.*........................................................................... $ 2,031,250
51,079 Romac International, Inc.*............................................................. 1,430,212
60,000 TeleSpectrum Worldwide Inc.*........................................................... 506,250
------------
9,520,212
------------
COMMUNICATIONS - EQUIPMENT/MANUFACTURERS (1.6%)
100,000 Bay Networks, Inc.*.................................................................... 2,768,750
30,000 FORE Systems, Inc.*.................................................................... 654,375
100,000 Network Equipment Technologies, Inc.*.................................................. 1,568,750
------------
4,991,875
------------
COMPUTER EQUIPMENT (0.3%)
10,000 Storage Technology Corp.*.............................................................. 838,750
------------
COMPUTER SOFTWARE & SERVICES (15.1%)
50,000 Acxiom Corp.*.......................................................................... 1,081,250
50,000 American Business Information, Inc. (Class B)*......................................... 625,000
60,000 Aspen Technology, Inc.*................................................................ 2,670,000
60,000 AXENT Technologies, Inc.*.............................................................. 1,470,000
40,000 BroadVision, Inc.*..................................................................... 635,000
60,000 Brooktrout Technology, Inc.*........................................................... 1,087,500
130,000 Business Objects S.A. (ADR) (France)*.................................................. 2,193,750
30,000 Cadence Design Systems, Inc.*.......................................................... 1,057,500
60,000 Certicom Corp. (Canada)*............................................................... 1,359,703
30,000 Cognicase Inc.*........................................................................ 457,500
30,000 Datastream Systems, Inc.*.............................................................. 633,750
60,000 Dendrite International, Inc.*.......................................................... 1,785,000
50,000 Documentum, Inc.*...................................................................... 2,350,000
30,000 FileNET Corp.*......................................................................... 1,650,000
100,000 IDT Corp.*............................................................................. 2,612,500
40,000 InterVU Inc.*.......................................................................... 650,000
18,000 JDA Software Group, Inc.*.............................................................. 810,000
80,000 Legato Systems, Inc.*.................................................................. 2,280,000
50,000 Macromedia, Inc.*...................................................................... 790,625
60,000 MAPICS, Inc.*.......................................................................... 1,050,000
30,000 New Dimension Sofware Ltd. (Israel)*................................................... 851,250
30,000 New Era of Networks, Inc.*............................................................. 802,500
60,000 Novell, Inc.*.......................................................................... 630,000
40,000 Open Text Corp. (Canada)*.............................................................. 700,000
30,000 OzEmail Ltd. (ADR) (Australia)......................................................... 571,875
30,000 Pinnacle Systems, Inc.*................................................................ 1,001,250
30,000 Platinum Technology, Inc.*............................................................. 817,500
30,000 Policy Management Systems Corp.*....................................................... 2,475,000
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
3
<PAGE>
MORGAN STANLEY DEAN WITTER CAPITAL APPRECIATION FUND
PORTFOLIO OF INVESTMENTS MAY 31, 1998 (UNAUDITED) CONTINUED
<TABLE>
<CAPTION>
NUMBER OF
SHARES VALUE
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
120,000 PsiNet, Inc.*.......................................................................... $ 1,290,000
50,000 Rational Software Corp.*............................................................... 762,500
50,000 Segue Software, Inc.*.................................................................. 646,875
70,000 Software AG Systems, Inc.*............................................................. 1,706,250
30,000 SPR Inc.*.............................................................................. 832,500
60,000 Summit Design, Inc.*................................................................... 892,500
60,000 Symix Systems, Inc.*................................................................... 1,162,500
40,000 Systems & Computer Technology Corp.*................................................... 1,017,500
40,000 TSI International Software Ltd.*....................................................... 877,500
70,000 Xylan Corp.*........................................................................... 1,680,000
------------
45,966,578
------------
COMPUTERS (5.4%)
45,000 Cybex Corp*............................................................................ 1,029,375
60,000 Hutchinson Technology Inc.*............................................................ 1,500,000
50,000 Lexmark International Group, Inc. (Class A)*........................................... 2,775,000
50,000 MICROS Systems, Inc.*.................................................................. 2,900,000
130,000 Musicland Stores Corp.*................................................................ 1,876,875
110,000 Network Appliance, Inc.*............................................................... 3,822,500
100,000 Sunquest Information Systems, Inc.*.................................................... 862,500
100,000 Xircom, Inc.*.......................................................................... 1,562,500
------------
16,328,750
------------
COMPUTERS - SYSTEMS (2.1%)
40,000 Apple Computer, Inc.*.................................................................. 1,062,500
20,000 EMC Corp.*............................................................................. 828,750
50,000 Gerber Scientific, Inc................................................................. 1,259,375
70,000 Mentor Graphics Corp.*................................................................. 770,000
100,000 Unisys Corp.*.......................................................................... 2,450,000
------------
6,370,625
------------
COSMETICS (0.2%)
30,000 NBTY, Inc.*............................................................................ 521,250
------------
DATA PROCESSING (0.7%)
40,000 Choicepoint Inc.*...................................................................... 2,080,000
------------
EDUCATION (0.5%)
43,000 Education Management Corp.*............................................................ 1,494,250
------------
ELECTRIC (0.2%)
20,000 Jabil Circuit, Inc.*................................................................... 681,250
------------
ELECTRONIC & ELECTRICAL EQUIPMENT (0.1%)
25,000 Artisan Components, Inc.*.............................................................. 421,875
------------
<CAPTION>
NUMBER OF
SHARES VALUE
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ELECTRONIC - MAJOR COMPANIES (0.3%)
30,000 Aris Corp.*............................................................................ $ 840,000
1,700 Manhattan Associates, Inc.*............................................................ 34,000
------------
874,000
------------
ELECTRONIC COMPONENTS (0.2%)
40,000 EFTC Corp.*............................................................................ 580,000
------------
ELECTRONICS (1.1%)
50,000 Aeroflex Inc.*......................................................................... 562,500
30,000 Avid Technology, Inc.*................................................................. 1,215,000
30,000 Oak Industries Inc.*................................................................... 1,046,250
30,000 PMT Services, Inc.*.................................................................... 581,250
------------
3,405,000
------------
ELECTRONICS - INSTRUMENTATION (0.8%)
40,000 EG & G, Inc............................................................................ 1,260,000
30,000 Qlogic Corp.*.......................................................................... 1,215,000
------------
2,475,000
------------
ELECTRONICS - SEMICONDUCTORS/COMPONENTS (2.4%)
30,000 DuPont Photomasks, Inc.*............................................................... 1,275,000
80,000 MTI Technology Corp.*.................................................................. 1,070,000
20,000 PMC - Sierra, Inc. (Canada)*........................................................... 777,500
30,000 Uniphase Corp.*........................................................................ 1,526,250
100,000 Vitesse Semiconductor Corp.*........................................................... 2,556,250
------------
7,205,000
------------
ENERGY (1.1%)
25,000 Diamond Offshore Drilling, Inc......................................................... 1,195,312
55,000 KTI, Inc.*............................................................................. 1,216,875
20,000 Transocean Offshore, Inc............................................................... 986,250
------------
3,398,437
------------
ENTERTAINMENT (1.4%)
150,000 Acclaim Entertainment, Inc.*........................................................... 956,250
23,900 ResortQuest International, Inc.*....................................................... 362,981
30,000 Sabre Group Holdings, Inc.*............................................................ 1,051,875
30,000 Steinway Musical Instruments Inc.*..................................................... 898,125
30,000 Travel Services International, Inc.*................................................... 1,042,500
------------
4,311,731
------------
ENVIRONMENTAL (0.6%)
70,000 Allied Waste Industries, Inc.*......................................................... 1,846,250
------------
ENVIRONMENTAL CONTROL (0.2%)
30,000 Newpark Resources, Inc.*............................................................... 545,625
------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
4
<PAGE>
MORGAN STANLEY DEAN WITTER CAPITAL APPRECIATION FUND
PORTFOLIO OF INVESTMENTS MAY 31, 1998 (UNAUDITED) CONTINUED
<TABLE>
<CAPTION>
NUMBER OF
SHARES VALUE
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ETHICAL DRUGS & DISTRIBUTIONS (0.1%)
20,000 Spiros Development (Units)*++.......................................................... $ 327,500
------------
FINANCIAL SERVICES (0.8%)
30,000 AmeriCredit Corp.*..................................................................... 978,750
2,000 Resource America, Inc. (Class A)....................................................... 132,500
30,000 Southern Pacific Funding Corp.*........................................................ 461,250
30,000 Webster Financial Corp................................................................. 995,625
------------
2,568,125
------------
HEALTH EQUIPMENT & SERVICES (0.2%)
30,000 United Payors & United Providers, Inc.*................................................ 603,750
------------
HEALTHCARE (0.8%)
30,000 Allegiance Corp........................................................................ 1,500,000
30,000 Res-Care, Inc.*........................................................................ 945,000
------------
2,445,000
------------
HEALTHCARE - SPECIALIZED SERVICES (1.0%)
60,000 ALZA Corp. (Class A)*.................................................................. 2,902,500
------------
HOME ENTERTAINMENT (0.4%)
30,000 Electronic Arts Inc.*.................................................................. 1,297,500
------------
HOSPITAL MANAGEMENT (0.3%)
50,000 Veterinary Centers of America, Inc.*................................................... 928,125
------------
HOUSEHOLD FURNISHINGS & APPLIANCES (0.9%)
30,000 Furniture Brands International, Inc.*.................................................. 885,000
85,000 Haverty Furniture Companies, Inc....................................................... 1,848,750
------------
2,733,750
------------
HOUSING & HOME FURNISHINGS (0.1%)
30,000 Shaw Industries, Inc................................................................... 480,000
------------
INSURANCE (0.2%)
20,000 INSpire Insurance Solutions, Inc.*..................................................... 645,000
------------
INTERNET (0.3%)
35,000 Preview Travel, Inc.*.................................................................. 988,750
------------
INVESTMENT COMPANIES (0.3%)
22,400 Affiliated Managers Group, Inc.*....................................................... 802,200
------------
LEISURE TIME/EQUIPMENT (0.2%)
50,000 Handleman Co.*......................................................................... 612,500
------------
<CAPTION>
NUMBER OF
SHARES VALUE
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
MACHINERY (1.3%)
80,000 National-Oilwell, Inc.*................................................................ $ 2,795,000
40,000 Terex Corp.*........................................................................... 1,232,500
------------
4,027,500
------------
MANUFACTURING (0.9%)
40,000 Johnstown America Industries, Inc.*.................................................... 720,000
40,000 NN Ball & Roller, Inc.................................................................. 460,000
130,000 Oakley, Inc.*.......................................................................... 1,698,125
------------
2,878,125
------------
MEDIA GROUP (0.3%)
30,000 Outdoor Systems, Inc.*................................................................. 900,000
------------
MEDICAL PRODUCTS & SUPPLIES (1.0%)
30,000 Serologicals Corp.*.................................................................... 870,000
80,000 Trex Medical Corp.*.................................................................... 1,350,000
30,000 Ventana Medical Systems, Inc.*......................................................... 776,250
------------
2,996,250
------------
METALS & MINING (0.0%)
1,000 BRO-X Minerals Ltd. (Canada)*.......................................................... 481
------------
MISCELLANEOUS (0.8%)
50,000 Mail-Well, Inc.*....................................................................... 2,300,000
------------
NATURAL GAS (0.3%)
50,000 Basin Exploration, Inc.*............................................................... 787,500
------------
OIL SERVICES (9.1%)
60,000 Cal Dive International, Inc.*.......................................................... 2,010,000
100,000 Canadian 88 Energy Corp. (Canada)*..................................................... 446,367
110,000 Core Laboratories N.V.*................................................................ 2,901,250
30,000 ENSCO International, Inc............................................................... 759,375
40,000 Evi Weatherford Inc.*.................................................................. 2,022,500
50,000 Friede Goldman International Inc.*..................................................... 1,662,500
90,000 Global Industries Ltd.*................................................................ 1,912,500
87,400 Gulf Island Fabrication, Inc.*......................................................... 1,933,725
60,000 Mallon Resources Corp.*................................................................ 645,000
60,000 Marine Drilling Company, Inc.*......................................................... 1,128,750
70,000 Noble Drilling Corp.*.................................................................. 2,065,000
60,000 Oceaneering International, Inc.*....................................................... 1,290,000
50,000 Patterson Energy, Inc.*................................................................ 559,375
30,000 Stolt Comex Seaway, S.A. (United Kingdom)*............................................. 946,875
50,000 Stone Energy Corp.*.................................................................... 1,771,875
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
5
<PAGE>
MORGAN STANLEY DEAN WITTER CAPITAL APPRECIATION FUND
PORTFOLIO OF INVESTMENTS MAY 31, 1998 (UNAUDITED) CONTINUED
<TABLE>
<CAPTION>
NUMBER OF
SHARES VALUE
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
25,000 Superior Energy Services, Inc.*........................................................ $ 240,625
50,000 Unit Corp.*............................................................................ 390,625
80,000 Varco International, Inc.*............................................................. 2,085,000
55,000 Veritas DGC Inc.*...................................................................... 2,849,688
------------
27,621,030
------------
PAPER PRODUCTS (0.2%)
30,000 Getty Images, Inc.*.................................................................... 607,500
------------
PHARMACEUTICALS (3.1%)
100,000 Advance Paradigm, Inc.*................................................................ 3,537,500
30,000 Algos Pharmaceutical Corp.*............................................................ 1,091,250
30,000 ChiRex, Inc.*.......................................................................... 633,750
70,000 ImClone Systems, Inc.*................................................................. 765,625
50,000 MedImmune, Inc.*....................................................................... 2,493,750
40,000 SangStat Medical Corp.*................................................................ 1,045,000
------------
9,566,875
------------
POLLUTION CONTROL (1.3%)
100,000 American Disposal Services, Inc.*...................................................... 3,912,500
------------
PROPERTY - CASUALTY INSURANCE (1.1%)
50,000 Reliance Group Holdings, Inc........................................................... 903,125
60,000 Stewart Information Services Corp...................................................... 2,302,500
------------
3,205,625
------------
PUBLISHING (0.6%)
30,000 Big Flower Holdings, Inc.*............................................................. 920,625
40,000 Petersen Companies, Inc. (Class A)*.................................................... 985,000
------------
1,905,625
------------
RESTAURANTS (0.6%)
30,000 Consolidated Products, Inc.*........................................................... 594,375
30,000 Outback Steakhouse, Inc.*.............................................................. 1,104,375
------------
1,698,750
------------
RETAIL (3.5%)
60,000 AnnTaylor Stores Corp.*................................................................ 1,308,750
40,000 Bed Bath & Beyond, Inc.*............................................................... 2,007,500
40,000 Buckle (THE), Inc.*.................................................................... 2,040,000
20,000 Kohl's Corp.*.......................................................................... 951,250
40,000 Maxim Group, Inc.*..................................................................... 675,000
40,000 Party City Corp.*...................................................................... 1,170,000
60,000 Shoe Carnival Inc.*.................................................................... 825,000
30,000 Signet Group PLC (ADR) (United Kingdom)*............................................... 693,750
60,000 Stein Mart, Inc.*...................................................................... 945,000
------------
10,616,250
------------
<CAPTION>
NUMBER OF
SHARES VALUE
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
RETAIL - DEPARTMENT STORES (1.3%)
80,000 Elder-Beerman Stores Corp.*............................................................ $ 1,990,000
30,000 Payless ShoeSource, Inc.*.............................................................. 2,101,875
------------
4,091,875
------------
RETAIL - FOOD CHAINS (0.3%)
30,000 Wild Oats Markets, Inc.*............................................................... 858,750
------------
RETAIL - GENERAL MERCHANDISE (0.2%)
30,000 Loblaw Companies Ltd. (Canada)......................................................... 659,250
------------
RETAIL - SPECIALTY (4.7%)
50,000 Baker (J.), Inc........................................................................ 606,250
20,000 Costco Companies, Inc.*................................................................ 1,156,250
30,000 DM Management Co.*..................................................................... 915,000
60,000 Houghton Mifflin Co.................................................................... 2,085,000
120,000 Linens 'N Things, Inc.*................................................................ 3,855,000
30,000 Staples, Inc.*......................................................................... 751,875
100,000 Sunglass Hut International, Inc.*...................................................... 1,218,750
30,000 Talbot's, Inc. (The)................................................................... 856,875
60,000 TJX Companies, Inc..................................................................... 2,805,000
------------
14,250,000
------------
SPECIALIZED SERVICES (0.4%)
60,000 RCM Technologies, Inc.*................................................................ 1,245,000
------------
SPORTING GOODS (0.3%)
30,000 Hibbett Sporting Goods, Inc.*.......................................................... 993,750
------------
TECHNOLOGY (1.2%)
30,000 Kroll-O'Gara Co.*...................................................................... 652,500
70,000 Kuhlman Corp........................................................................... 2,957,500
------------
3,610,000
------------
TELECOMMUNICATIONS (5.7%)
40,000 ANTEC Corp.*........................................................................... 765,000
328,000 CGI Group, Inc. (Canada)*.............................................................. 6,779,838
60,000 Qwest Communications International Inc.*............................................... 1,983,750
40,000 SkyTel Communications Inc.*............................................................ 905,000
100,000 STAR Telecommunications, Inc.*......................................................... 2,350,000
60,000 Startec Global Communications Corp.*................................................... 982,500
50,000 WinStar Communications, Inc.*.......................................................... 1,862,500
40,000 World Access, Inc.*.................................................................... 1,250,000
50,000 WorldPort Communications, Inc.*........................................................ 556,250
------------
17,434,838
------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
6
<PAGE>
MORGAN STANLEY DEAN WITTER CAPITAL APPRECIATION FUND
PORTFOLIO OF INVESTMENTS MAY 31, 1998 (UNAUDITED) CONTINUED
<TABLE>
<CAPTION>
NUMBER OF
SHARES VALUE
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
TELECOMMUNICATIONS - LONG DISTANCE (1.1%)
90,000 ITC DeltaCom, Inc.*.................................................................... $ 3,217,500
------------
TELECOMMUNICATIONS EQUIPMENT (3.1%)
30,000 Advanced Fibre Communications, Inc.*................................................... 1,110,000
59,500 AFC Cable Systems, Inc.*............................................................... 1,985,813
60,000 Applied Voice Technology, Inc.*........................................................ 1,125,000
70,000 e. Spire Communications, Inc.*......................................................... 1,128,750
25,000 L-3 Communications Holdings, Inc.*..................................................... 700,000
110,000 RIT Technologies Ltd.*................................................................. 1,237,500
30,000 Tellabs, Inc.*......................................................................... 2,060,625
------------
9,347,688
------------
TEXTILES (0.1%)
30,000 Donna Karan International Inc.*........................................................ 420,000
------------
TEXTILES - APPAREL (0.4%)
30,000 Fruit of the Loom, Inc. (Class A)*..................................................... 1,078,125
------------
TRANSPORTATION (1.4%)
48,000 Coach USA, Inc.*....................................................................... 2,067,000
35,000 Offshore Logistics, Inc.*.............................................................. 713,125
30,000 Sea Containers, Ltd. (Class A)......................................................... 1,213,125
17,000 Trico Marine Service, Inc.*............................................................ 337,875
------------
4,331,125
------------
UTILITIES (0.3%)
30,000 Hagler Bailly, Inc.*................................................................... 821,250
------------
WASTE DISPOSAL (0.9%)
95,000 Eastern Environmental Services, Inc.*.................................................. 2,683,750
------------
WIRELESS COMMUNICATION (0.3%)
30,000 Metro One Telecommunications*.......................................................... 348,750
30,000 Powerwave Technologies, Inc.*.......................................................... 573,750
------------
922,500
------------
TOTAL COMMON STOCKS
(IDENTIFIED COST $253,313,447)......................................................... 288,324,945
------------
PREFERRED STOCK (0.0%)
MEDICAL PRODUCTS & SUPPLIES
30,000 Fresenius National Medical Care (Class D) (Germany) (IDENTIFIED COST $6,069)........... 1,950
------------
<CAPTION>
PRINCIPAL
AMOUNT IN
THOUSANDS VALUE
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
SHORT-TERM INVESTMENTS (5.3%)
U.S. GOVERNMENT AGENCY (a) (3.6%)
$ 11,000 Federal Home Loan Mortgage Corp. 5.55% due 06/01/98 (AMORTIZED COST $11,000,000)....... $ 11,000,000
------------
REPURCHASE AGREEMENT (1.7%)
5,256 The Bank of New York 5.50% due 06/01/98 (dated 05/29/98; proceeds $5,258,240) (b)
(IDENTIFIED COST $5,255,831)......................................................... 5,255,831
------------
TOTAL SHORT-TERM INVESTMENTS
(IDENTIFIED COST $16,255,831).......................................................... 16,255,831
------------
TOTAL INVESTMENTS
(IDENTIFIED COST $269,575,347) (C)........................................................ 100.0 % 304,582,726
LIABILITIES IN EXCESS OF OTHER ASSETS..................................................... (0.0) (31,805)
------ -------------
NET ASSETS................................................................................ 100.0 % $ 304,550,921
===== =============
</TABLE>
- ---------------------
ADR American Depository Receipt.
* Non-income producing security.
++ Consists of more than one class of securities traded together as a unit;
stocks with attached warrants.
(a) Security was purchased on a discount basis. The interest rate shown has
been adjusted to reflect a money market equivalent yield.
(b) Collateralized by $4,418,339 Government National Mortgage Assoc. 7.00% due
08/20/23 valued at $2,376,198 and $3,063,450 U.S. Treasury Bill 0.00% due
11/27/98 valued at $2,984,749.
(c) The aggregate cost for federal income tax purposes approximates identified
cost. The aggregate gross unrealized appreciation is $44,167,839 and the
aggregate gross unrealized depreciation is $9,160,460, resulting in net
unrealized appreciation of $35,007,379.
SEE NOTES TO FINANCIAL STATEMENTS
7
<PAGE>
MORGAN STANLEY DEAN WITTER CAPITAL APPRECIATION FUND
FINANCIAL STATEMENTS
STATEMENT OF ASSETS AND LIABILITIES
MAY 31, 1998 (UNAUDITED)
<TABLE>
<CAPTION>
ASSETS:
<S> <C>
Investments in securities, at value
(identified cost $269,575,347).............................................................. $304,582,726
Receivable for:
Investments sold.......................................................................... 4,813,795
Shares of beneficial interest sold........................................................ 119,790
Dividends................................................................................. 14,208
Deferred organizational expenses.............................................................. 86,130
Prepaid expenses and other assets............................................................. 109,205
------------
TOTAL ASSETS............................................................................. 309,725,854
------------
LIABILITIES:
Payable for:
Investments purchased..................................................................... 4,134,738
Shares of beneficial interest repurchased................................................. 472,553
Plan of distribution fee.................................................................. 273,857
Investment management fee................................................................. 206,956
Accrued expenses and other payables........................................................... 86,829
------------
TOTAL LIABILITIES........................................................................ 5,174,933
------------
NET ASSETS............................................................................... $304,550,921
============
COMPOSITION OF NET ASSETS:
Paid-in-capital............................................................................... $249,539,040
Net unrealized appreciation................................................................... 35,007,379
Net investment loss........................................................................... (3,184,461)
Accumulated undistributed net realized gain................................................... 23,188,963
------------
NET ASSETS............................................................................... $304,550,921
============
CLASS A SHARES:
Net Assets.................................................................................... $814,616
Shares Outstanding (UNLIMITED AUTHORIZED, $.01 PAR VALUE)..................................... 59,451
NET ASSET VALUE PER SHARE................................................................ $13.70
============
MAXIMUM OFFERING PRICE PER SHARE,
(NET ASSET VALUE PLUS 5.54% OF NET ASSET VALUE)........................................ $14.46
============
CLASS B SHARES:
Net Assets.................................................................................... $300,938,226
Shares Outstanding (UNLIMITED AUTHORIZED, $.01 PAR VALUE)..................................... 22,109,133
NET ASSET VALUE PER SHARE................................................................ $13.61
============
CLASS C SHARES:
Net Assets.................................................................................... $1,713,373
Shares Outstanding (UNLIMITED AUTHORIZED, $.01 PAR VALUE)..................................... 125,868
NET ASSET VALUE PER SHARE................................................................ $13.61
============
CLASS D SHARES:
Net Assets.................................................................................... $1,084,706
Shares Outstanding (UNLIMITED AUTHORIZED, $.01 PAR VALUE)..................................... 79,013
NET ASSET VALUE PER SHARE................................................................ $13.73
============
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
8
<PAGE>
MORGAN STANLEY DEAN WITTER CAPITAL APPRECIATION FUND
FINANCIAL STATEMENTS, CONTINUED
STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED MAY 31, 1998 (UNAUDITED)
NET INVESTMENT INCOME:
<TABLE>
<CAPTION>
INCOME
<S> <C>
Dividends (net of $500 foreign withholding tax)................................................ $ 175,278
Interest....................................................................................... 131,712
-----------
TOTAL INCOME.............................................................................. 306,990
-----------
EXPENSES
Plan of distribution fee (Class A shares)...................................................... 843
Plan of distribution fee (Class B shares)...................................................... 1,671,084
Plan of distribution fee (Class C shares)...................................................... 9,501
Investment management fee...................................................................... 1,268,728
Transfer agent fees and expenses............................................................... 352,065
Registration fees.............................................................................. 67,136
Shareholder reports and notices................................................................ 37,077
Custodian fees................................................................................. 32,731
Professional fees.............................................................................. 25,239
Organizational expenses........................................................................ 17,832
Trustees' fees and expenses.................................................................... 6,740
Other.......................................................................................... 2,475
-----------
TOTAL EXPENSES............................................................................ 3,491,451
-----------
NET INVESTMENT LOSS....................................................................... (3,184,461)
-----------
NET REALIZED AND UNREALIZED GAIN (LOSS):
Net realized gain.............................................................................. 13,670,887
Net change in unrealized appreciation.......................................................... (12,167,315)
-----------
NET GAIN.................................................................................. 1,503,572
-----------
NET DECREASE................................................................................... $(1,680,889)
===========
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
9
<PAGE>
MORGAN STANLEY DEAN WITTER CAPITAL APPRECIATION FUND
FINANCIAL STATEMENTS, CONTINUED
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
FOR THE SIX FOR THE YEAR
MONTHS ENDED ENDED
MAY 31, 1998 NOVEMBER 30, 1997*
- ------------------------------------------------------------------------------------------------------------
(UNAUDITED)
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
OPERATIONS:
Net investment loss....................................................... $ (3,184,461) $ (6,153,061)
Net realized gain......................................................... 13,670,887 38,570,804
Net change in unrealized appreciation..................................... (12,167,315) (6,517,638)
------------ ------------
NET INCREASE (DECREASE).............................................. (1,680,889) 25,900,105
------------ ------------
DISTRIBUTIONS TO SHAREHOLDERS FROM NET REALIZED GAIN:
Class A shares............................................................ (16,866) --
Class B shares............................................................ (12,266,897) --
Class C shares............................................................ (47,349) --
Class D shares............................................................ (19,419) --
------------ ------------
TOTAL DISTRIBUTIONS.................................................. (12,350,531) --
------------ ------------
Net increase (decrease) from transactions in shares of beneficial
interest................................................................ (48,669,523) 30,542,778
------------ ------------
NET INCREASE (DECREASE).............................................. (62,700,943) 56,442,883
NET ASSETS:
Beginning of period....................................................... 367,251,864 310,808,981
------------ ------------
END OF PERIOD
(INCLUDING A NET INVESTMENT LOSS OF $3,184,461 AND $0,
RESPECTIVELY)......................................................... $304,550,921 $367,251,864
============ ============
</TABLE>
- ---------------------
* Class A, Class C and Class D shares were issued July 28, 1997.
SEE NOTES TO FINANCIAL STATEMENTS
10
<PAGE>
MORGAN STANLEY DEAN WITTER CAPITAL APPRECIATION FUND
NOTES TO FINANCIAL STATEMENTS MAY 31, 1998 (UNAUDITED)
1. ORGANIZATION AND ACCOUNTING POLICIES
Morgan Stanley Dean Witter Capital Appreciation 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 long-term capital appreciation. The Fund was organized as a
Massachusetts business trust on July 31, 1995 and commenced operations on
October 27, 1995. On July 28, 1997, the Fund commenced offering three additional
classes of shares, with the then current shares designated as Class B shares.
Effective June 22, 1998, the following entities have changed their name:
<TABLE>
<CAPTION>
Old Name New Name
- -------- --------
<S> <C>
Dean Witter Capital Appreciation Fund Morgan Stanley Dean Witter Capital Appreciation Fund
Dean Witter InterCapital Inc. Morgan Stanley Dean Witter Advisors Inc.
Dean Witter Distributors Inc. Morgan Stanley Dean Witter Distributors Inc.
</TABLE>
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, 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 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 (in cases
where securities are traded on more than one exchange, the securities are valued
on the exchange designated as the primary market pursuant to procedures adopted
by the Trustees); (2) all other portfolio securities for which over-the-counter
market quotations are readily available are valued at the latest 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 Morgan
Stanley Dean
11
<PAGE>
MORGAN STANLEY DEAN WITTER CAPITAL APPRECIATION FUND
NOTES TO FINANCIAL STATEMENTS MAY 31, 1998 (UNAUDITED) CONTINUED
Witter Advisors Inc. (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 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
except for certain dividends on foreign securities which are recorded as soon as
the Fund is informed after 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
12
<PAGE>
MORGAN STANLEY DEAN WITTER CAPITAL APPRECIATION FUND
NOTES TO FINANCIAL STATEMENTS MAY 31, 1998 (UNAUDITED) CONTINUED
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. ORGANIZATIONAL EXPENSES -- The Investment Manager paid the organizational
expenses of the Fund in the amount of approximately $179,000 and was reimbursed
for the full amount thereof. Such expenses have been deferred and are being
amortized on the straight-line method over a period not to exceed five years
from the commencement of operations.
2. INVESTMENT MANAGEMENT AGREEMENT
Pursuant to an Investment Management Agreement, the Fund pays the Investment
Manager a management fee, accrued daily and payable monthly, by applying the
following annual rates to the net assets of the Fund determined as of the close
of each business day: 0.75% to the portion of daily net assets not exceeding
$500 million and 0.725% to the portion of daily net assets in excess of $500
million.
Under the terms of the Agreement, in addition to managing the Fund's
investments, the Investment Manager maintains certain of the Fund's books and
records and furnishes, at its own expense, office space, facilities, equipment,
clerical, bookkeeping and certain legal services and pays the salaries of all
personnel, including officers of the Fund who are employees of the Investment
Manager. The Investment Manager also bears the cost of telephone services, heat,
light, power and other utilities provided to the Fund.
3. PLAN OF DISTRIBUTION
Shares of the Fund are distributed by Morgan Stanley Dean Witter Distributors
Inc. (the "Distributor"), an affiliate of the Manager. The Fund has adopted a
Plan of Distribution (the "Plan") pursuant to Rule 12b-1 under the Act. The Plan
provides that the Fund will pay the Distributor a fee which is accrued daily and
paid monthly at the following annual rates: (i) Class A -- up to 0.25% of the
average daily net assets of Class A; (ii) Class B -- 1.0% of the lesser of: (a)
the average daily aggregate gross sales of the Class B shares since inception of
the Fund (not including reinvestment of dividend or capital gain distributions)
less the average net asset value of the Class B shares redeemed since the Fund's
inception upon which a contingent deferred sales charge has been imposed or
waived; or (b) the average daily net assets of Class B; and (iii) Class C -- up
to 1.0% of the average daily net assets of Class C. In the case of Class A
shares, amounts paid under the Plan
13
<PAGE>
MORGAN STANLEY DEAN WITTER CAPITAL APPRECIATION FUND
NOTES TO FINANCIAL STATEMENTS MAY 31, 1998 (UNAUDITED) CONTINUED
are paid to the Distributor for services provided. In the case of Class B and
Class C shares, amounts paid under the Plan are paid to the Distributor for
services provided and the expenses borne by it and others in the distribution of
the shares of these Classes, including the payment of commissions for sales of
these Classes and incentive compensation to, and expenses of, Morgan Stanley
Dean Witter Financial Advisors and others who engage in or support distribution
of the shares or who service shareholder accounts, including overhead and
telephone expenses; printing and distribution of prospectuses and reports used
in connection with the offering of these shares to other than current
shareholders; and preparation, printing and distribution of sales literature and
advertising materials. In addition, the Distributor may utilize fees paid
pursuant to the Plan, in the case of Class B shares, to compensate Dean Witter
Reynolds Inc. ("DWR"), an affiliate of the Investment Manager and Distributor,
and other selected broker-dealers for their opportunity costs in advancing such
amounts, which compensation would be in the form of a carrying charge on any
unreimbursed expenses.
In the case of Class B shares, provided that the Plan continues in effect, any
cumulative expenses incurred by the Distributor but not yet recovered may be
recovered through the payment of future distribution fees from the Fund pursuant
to the Plan and contingent deferred sales charges paid by investors upon
redemption of Class B shares. Although there is no legal obligation for the Fund
to pay expenses incurred in excess of payments made to the Distributor under the
Plan and the proceeds of contingent deferred sales charges paid by investors
upon redemption of shares, if for any reason the Plan is terminated, the
Trustees will consider at that time the manner in which to treat such expenses.
The Distributor has advised the Fund that such excess amounts, including
carrying charges, totaled $11,435,574 at May 31, 1998.
In the case of Class A shares and Class C shares, expenses incurred pursuant to
the Plan in any calendar year in excess of 0.25% or 1.0% of the average daily
net assets of Class A or Class C, respectively, will not be reimbursed by the
Fund through payments in any subsequent year, except that expenses representing
a gross sales credit to Morgan Stanley Dean Witter Financial Advisors or other
selected broker-dealer representatives may be reimbursed in the subsequent
calendar year. For the six months ended May 31, 1998, 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 six months ended May 31,
1998, it received contingent deferred sales charges from certain redemptions of
the Fund's Class B shares and Class C
14
<PAGE>
MORGAN STANLEY DEAN WITTER CAPITAL APPRECIATION FUND
NOTES TO FINANCIAL STATEMENTS MAY 31, 1998 (UNAUDITED) CONTINUED
shares of $501,230 and $15,716, respectively and received $8,683 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 six months ended May 31, 1998 aggregated
$379,206,734 and $460,276,440, respectively.
For the six months ended May 31, 1998, the Fund incurred brokerage commissions
of $16,350 with DWR for portfolio transactions executed on behalf of the fund.
For the six months ended May 31, 1998, the Fund incurred brokerage commissions
of $32,298 with Morgan Stanley & Co., Inc., an affiliate of the Investment
Manager, for portfolio transactions executed on behalf of the Fund.
Morgan Stanley Dean Witter Trust FSB, an affiliate of the Investment Manager and
Distributor, is the Fund's transfer agent. At May 31, 1998, the Fund had
transfer agent fees and expenses payable of approximately $12,500.
15
<PAGE>
MORGAN STANLEY DEAN WITTER CAPITAL APPRECIATION FUND
NOTES TO FINANCIAL STATEMENTS MAY 31, 1998 (UNAUDITED) CONTINUED
5. SHARES OF BENEFICIAL INTEREST
Transactions in shares of beneficial interest were as follows:
<TABLE>
<CAPTION>
FOR THE SIX
MONTHS ENDED
MAY 31, 1998 FOR THE YEAR
---------------------------- ENDED
NOVEMBER 30, 1997*
(UNAUDITED) --------------------------
SHARES AMOUNT SHARES AMOUNT
----------- -------------- ----------- ------------
<S> <C> <C> <C> <C>
CLASS A SHARES
Sold............................................................. 39,212 $ 531,187 24,829 $ 380,181
Reinvestment of distributions.................................... 977 12,342 -- --
Repurchased...................................................... (4,922) (68,079) (645) (9,645)
----------- -------------- ----------- ------------
Net increase -- Class A.......................................... 35,267 475,450 24,184 370,536
----------- -------------- ----------- ------------
CLASS B SHARES
Sold............................................................. 2,043,140 28,691,181 15,086,938 211,255,509
Reinvestment of distributions.................................... 921,964 11,598,309 -- --
Repurchased...................................................... (6,559,323) (90,727,691) (13,313,433) (182,682,535)
----------- -------------- ----------- ------------
Net increase (decrease) -- Class B............................... (3,594,219) (50,438,201) 1,773,505 28,572,974
----------- -------------- ----------- ------------
CLASS C SHARES
Sold............................................................. 169,930 2,285,277 101,030 1,609,066
Reinvestment of distributions.................................... 3,263 41,082 -- --
Repurchased...................................................... (137,884) (1,891,877) (10,471) (153,924)
----------- -------------- ----------- ------------
Net increase -- Class C.......................................... 35,309 434,482 90,559 1,455,142
----------- -------------- ----------- ------------
CLASS D SHARES
Sold............................................................. 144,353 1,918,701 9,511 144,126
Reinvestment of distributions.................................... 376 4,754 -- --
Repurchased...................................................... (75,227) (1,064,709) -- --
----------- -------------- ----------- ------------
Net increase -- Class D.......................................... 69,502 858,746 9,511 144,126
----------- -------------- ----------- ------------
Net increase (decrease) in Fund.................................. (3,454,141) $ (48,669,523) 1,897,759 $ 30,542,778
=========== ============== =========== ============
</TABLE>
- ---------------------
* For Class A, C, and D shares, for the period July 28, 1997 (issue date)
through November 30, 1997.
6. FEDERAL INCOME TAX STATUS
As of November 30, 1997 the Fund had temporary book/tax differences attributable
to post-October losses deferrals on wash sales.
16
<PAGE>
MORGAN STANLEY DEAN WITTER CAPITAL APPRECIATION 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 SIX FOR THE OCTOBER 27,
MONTHS YEAR ENDED FOR THE 1995*
ENDED NOVEMBER YEAR ENDED THROUGH
MAY 31, 30, NOVEMBER NOVEMBER
1998++ 1997**++ 30, 1996 30, 1995
- --------------------------------------------------------------------------------------------
(UNAUDITED)
<S> <C> <C> <C> <C>
CLASS B SHARES
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of
period.............................. $ 14.22 $ 12.99 $ 10.53 $ 10.00
------- ------- ------- -------
Net investment loss.................. (0.13) (0.24) (0.15) (0.01)
Net realized and unrealized gain..... -- 1.47 2.61 0.54
------- ------- ------- -------
Total from investment operations..... (0.13) 1.23 2.46 0.53
------- ------- ------- -------
Less distributions from net realized
gain................................ (0.48) -- -- --
------- ------- ------- -------
Net asset value, end of period....... $ 13.61 $ 14.22 $ 12.99 $ 10.53
======= ======= ======= =======
TOTAL INVESTMENT RETURN+............. (0.61)%(1) 9.47% 23.36% 5.30%(1)
RATIOS TO AVERAGE NET ASSETS:
Expenses............................. 2.07%(2) 2.00% 2.00% 2.87%(2)
Net investment loss.................. (1.89)%(2) (1.79)% (1.72)% (0.79)%(2)
SUPPLEMENTAL DATA:
Net assets, end of period, in
thousands........................... $300,938 $365,484 $310,809 $102,009
Portfolio turnover rate.............. 113%(1) 184% 108% 7%(1)
Average commission rate paid......... $0.0560 $0.0570 $0.0570 --
</TABLE>
- ---------------------
* Commencement of operations.
** Prior to July 28, 1997, the Fund issued one class of shares. All shares of
the Fund held prior to that date have been designated Class B shares.
++ 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.
SEE NOTES TO FINANCIAL STATEMENTS
17
<PAGE>
MORGAN STANLEY DEAN WITTER CAPITAL APPRECIATION FUND
FINANCIAL HIGHLIGHTS, CONTINUED
<TABLE>
<CAPTION>
FOR THE PERIOD
JULY 28, 1997*
FOR THE SIX THROUGH
MONTHS ENDED NOVEMBER 30,
MAY 31, 1998++ 1997++
- -----------------------------------------------------------------------------------------------------------
(UNAUDITED)
<S> <C> <C>
CLASS A SHARES
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period.................................. $ 14.26 $ 14.34
------- -------
Net investment loss................................................... (0.08) (0.06)
Net realized and unrealized loss...................................... -- (0.02)
------- -------
Total from investment operations...................................... (0.08) (0.08)
------- -------
Less distributions from net realized gain............................. (0.48) --
------- -------
Net asset value, end of period........................................ $ 13.70 $ 14.26
======= =======
TOTAL INVESTMENT RETURN+.............................................. (0.25)%(1) (0.56)%(1)
RATIOS TO AVERAGE NET ASSETS:
Expenses.............................................................. 1.31%(2) 1.27%(2)
Net investment loss................................................... (1.12)%(2) (1.08)%(2)
SUPPLEMENTAL DATA:
Net assets, end of period, in thousands............................... $ 815 $ 345
Portfolio turnover rate............................................... 113%(1) 184%
Average commission rate paid.......................................... $0.0560 $0.0570
CLASS C SHARES
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period.................................. $ 14.22 $ 14.34
------- -------
Net investment loss................................................... (0.13) (0.09)
Net realized and unrealized loss...................................... -- (0.03)
------- -------
Total from investment operations...................................... (0.13) (0.12)
------- -------
Less distributions from net realized gain............................. (0.48) --
------- -------
Net asset value, end of period........................................ $ 13.61 $ 14.22
======= =======
TOTAL INVESTMENT RETURN+.............................................. (0.62)%(1) (0.84)%(1)
RATIOS TO AVERAGE NET ASSETS:
Expenses.............................................................. 2.08%(2) 2.03%(2)
Net investment loss................................................... (1.90)%(2) (1.82)%(2)
SUPPLEMENTAL DATA:
Net assets, end of period, in thousands............................... $1,713 $1,288
Portfolio turnover rate............................................... 113%(1) 184%
Average commission rate paid.......................................... $0.0560 $0.0570
</TABLE>
- ---------------------
* The date shares were first issued.
++ 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.
SEE NOTES TO FINANCIAL STATEMENTS
18
<PAGE>
MORGAN STANLEY DEAN WITTER CAPITAL APPRECIATION FUND
FINANCIAL HIGHLIGHTS, CONTINUED
<TABLE>
<CAPTION>
FOR THE PERIOD
JULY 28, 1997*
FOR THE SIX THROUGH
MONTHS ENDED NOVEMBER 30,
MAY 31, 1998++ 1997++
- -----------------------------------------------------------------------------------------------------------
(UNAUDITED)
<S> <C> <C>
CLASS D SHARES
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period.................................. $ 14.27 $ 14.34
------- -------
Net investment loss................................................... (0.06) (0.04)
Net realized and unrealized loss...................................... -- (0.03)
------- -------
Total from investment operations...................................... (0.06) (0.07)
------- -------
Less distributions from net realized gain............................. (0.48) --
------- -------
Net asset value, end of period........................................ $ 13.73 $ 14.27
======= =======
TOTAL INVESTMENT RETURN+.............................................. (0.11)%(1) (0.49)%(1)
RATIOS TO AVERAGE NET ASSETS:
Expenses.............................................................. 1.06%(2) 1.01%(2)
Net investment loss................................................... (0.87)%(2) (0.82)%(2)
SUPPLEMENTAL DATA:
Net assets, end of period, in thousands............................... $ 1,085 $ 136
Portfolio turnover rate............................................... 113%(1) 184%
Average commission rate paid.......................................... $0.0560 $0.0570
</TABLE>
- ---------------------
* The date shares were first issued.
++ 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.
SEE NOTES TO FINANCIAL STATEMENTS
19
<PAGE>
TRUSTEES
MORGAN STANLEY
Michael Bozic DEAN WITTER
Charles A. Fiumefreddo CAPITAL APPRECIATION
Edwin J. Garn FUND
John R. Haire
Wayne E. Hedien
Dr. Manuel H. Johnson
Michael E. Nugent
Philip J. Purcell
John L. Schroeder
OFFICERS
Charles A. Fiumefreddo
Chairman and Chief Executive Officer
Barry Fink
Vice President, Secretary and General Counsel
Ronald J. Worobel
Vice President
[PHOTO]
Thomas F. Caloia
Treasurer
TRANSFER AGENT
Morgan Stanley Dean Witter Trust FSB
Harborside Financial Center - Plaza Two
Jersey City, New Jersey 07311
INDEPENDENT ACCOUNTANTS
PricewaterhouseCoopers LLP
1177 Avenue of the Americas
New York, New York 10036
INVESTMENT MANAGER
Morgan Stanley Dean Witter Advisors Inc.
Two World Trade Center
New York, New York 10048
SEMIANNUAL REPORT
MAY 31, 1998
The financial statements included herein have been taken from the records
of the Fund without examination by the independent accountants and
accordingly they do not express an opinion thereon.
This report is submitted for the general information of shareholders of the
Fund. For more detailed information about the Fund, its officers and trustees,
fees, expenses and other pertinent information, please see the prospectus of
the Fund.
This report is not authorized for distribution to prospective investors in the
Fund unless preceded or accompanied by an effective prospectus.
<PAGE>
MORGAN STANLEY DEAN WITTER AMERICAN VALUE FUND
PART B
STATEMENT OF ADDITIONAL INFORMATION
This Statement of Additional Information relates to the shares of Morgan
Stanley Dean Witter American Value Fund ("American Value") to be issued
pursuant to an Agreement and Plan of Reorganization, dated October 28, 1998,
between American Value and Morgan Stanley Dean Witter Capital Appreciation Fund
("Capital Appreciation") in connection with the acquisition by American Value
of substantially all of the assets, subject to stated liabilities, of Capital
Appreciation. This Statement of Additional Information does not constitute a
prospectus. This Statement of Additional Information does not include all
information that a shareholder should consider before voting on the proposals
contained in the Proxy Statement and Prospectus, and, therefore, should be read
in conjunction with the related Proxy Statement and Prospectus, dated December
4, 1998. A copy of the Proxy Statement and Prospectus may be obtained without
charge by mailing a written request to American Value at Two World Trade
Center, New York, New York 10048 or by calling (212) 392-2550 or (800) 896-NEWS
(TOLL FREE). Please retain this document for future reference.
The date of this Statement of Additional Information is December 4, 1998.
B-1
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
INTRODUCTION ......................................... B-3
ADDITIONAL INFORMATION ABOUT AMERICAN VALUE .......... B-3
FINANCIAL STATEMENTS ................................. B-4
</TABLE>
B-2
<PAGE>
INTRODUCTION
This Statement of Additional Information is intended to supplement the
information provided in the Proxy Statement and Prospectus dated December 4,
1998 (the "Proxy Statement and Prospectus"). The Proxy Statement and Prospectus
has been sent to Capital Appreciation shareholders in connection with the
solicitation of proxies by the Board of Trustees of Capital Appreciation to be
voted at the Special Meeting of shareholders of Capital Appreciation to be held
on February 24, 1999. This Statement of Additional Information incorporates by
reference the Statement of Additional Information of American Value dated May
1, 1998 and the Statement of Additional Information of Capital Appreciation
dated January 29, 1998.
ADDITIONAL INFORMATION ABOUT DEAN WITTER STRATEGIST
INVESTMENT OBJECTIVES AND POLICIES
For additional information about American Value's investment objectives
and policies, see "Investment Practices and Policies" and "Investment
Restrictions" in American Value's Statement of Additional Information.
MANAGEMENT
For additional information about the Board of Trustees, officers and
management personnel of American Value, see "The Fund and its Management" and
"Trustees and Officers" in American Value's Statement of Additional
Information.
INVESTMENT ADVISORY AND OTHER SERVICES
For additional information about American Value's investment manager, see
"The Fund and its Management" in American Value's Statement of Additional
Information. For additional information about American Value's independent
auditors, see "Independent Accountants" in American Value's Statement of
Additional Information. For additional information about other services
provided to American Value, see "Custodian and Transfer Agent" and "Shareholder
Services" in American Value's Statement of Additional Information.
PORTFOLIO TRANSACTIONS AND BROKERAGE
For additional information about brokerage allocation practices, see
"Portfolio Transactions and Brokerage" in American Value's Statement of
Additional Information.
DESCRIPTION OF FUND SHARES
For additional information about the voting rights and other
characteristics of the shares of American Value, see "Shares of the Fund" in
American Value's Statement of Additional Information.
PURCHASE, REDEMPTION AND PRICING OF SHARES
For additional information about the purchase and redemption of American
Value's shares and the determination of net asset value, see "Purchase of Fund
Shares," "Redemptions and Repurchases," "Financial Statements -- December 31,
1997" and "Shareholder Services" in American Value's Statement of Additional
Information.
DIVIDENDS, DISTRIBUTIONS AND TAX STATUS
For additional information about American Value's policies regarding
dividends and distributions and tax matters affecting American Value and its
shareholders, see "Dividends, Distributions and Taxes," and "Financial
Statements -- December 31, 1997" in American Value's Statement of Additional
Information.
B-3
<PAGE>
DISTRIBUTION OF SHARES
For additional information about American Value's distributor and the
distribution agreement between American Value and its distributor, see
"Purchase of Fund Shares" in American Value's Statement of Additional
Information.
PERFORMANCE DATA
For additional information about American Value's performance, see
"Performance Information" in American Value's Statement of Additional
Information.
FINANCIAL STATEMENTS
American Value's most recent audited financial statements are set forth in
American Value's Annual Report for the fiscal year ended December 31, 1997 and
American Value's updated, unaudited financial statements are set forth in its
unaudited Semi-Annual Report for the six month period ended June 30, 1998.
Copies of both Reports accompany, and are incorporated by reference in, the
Proxy Statement and Prospectus. Capital Appreciation's most recent audited
financial statements are set forth in Capital Appreciation's Annual Report for
the fiscal year ended November 30, 1997, and Capital Appreciation's updated,
unaudited financial statements are set forth in its unaudited Semi-Annual
Report for the six month period ended May 31, 1998, which are incorporated by
reference in the Proxy Statement and Prospectus.
B-4
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION
MAY 1, 1998
Dean Witter
American
Value Fund
- -----------------------------------------------------------------------------
Dean Witter American Value Fund (the "Fund") is an open-end, diversified
management investment company whose investment objective is long-term capital
growth consistent with an effort to reduce volatility. The Fund invests
principally in common stock of companies in industries which, at the time of
investment, are believed to be attractively valued given their above average
relative earnings growth potential at that time. (See "Investment Practices
and Policies.")
A Prospectus for the Fund dated May 1, 1998, which provides the basic
information you should know before investing in the Fund, may be obtained
without charge from the Fund at its address or telephone numbers listed below
or from the Fund's Distributor, Dean Witter Distributors Inc., or from Dean
Witter Reynolds, Inc., at any of its branch offices. This Statement of
Additional Information is not a Prospectus. It contains information in
addition to and more detailed than that set forth in the Prospectus. It is
intended to provide you additional information regarding the activities and
operations of the Fund, and should be read in conjunction with the
Prospectus.
Dean Witter American Value Fund
Two World Trade Center
New York, New York 10048
(212) 392-2550 or
(800) 869-NEWS (toll-free)
<PAGE>
TABLE OF CONTENTS
- -----------------------------------------------------------------------------
<TABLE>
<CAPTION>
<S> <C>
The Fund and its Management........... 3
Trustees and Officers................. 6
Investment Practices and Policies .... 12
Investment Restrictions............... 25
Portfolio Transactions and Brokerage . 26
The Distributor....................... 28
Determination of Net Asset Value ..... 33
Purchase of Fund Shares .............. 33
Shareholder Services.................. 36
Redemptions and Repurchases........... 40
Dividends, Distributions and Taxes ... 41
Performance Information............... 43
Shares of the Fund.................... 44
Custodian and Transfer Agent.......... 45
Independent Accountants............... 45
Reports to Shareholders............... 45
Legal Counsel......................... 45
Experts............................... 45
Registration Statement................ 45
Financial Statements--December 31,
1997................................. 46
Report of Independent Accountants .... 62
</TABLE>
2
<PAGE>
THE FUND AND ITS MANAGEMENT
- -----------------------------------------------------------------------------
THE FUND
The Fund was incorporated in the State of Maryland on December 13, 1979
under the name InterCapital Industry-Valued Securities Inc. On March 16, 1983
the Fund's shareholders approved a change in the Fund's name, effective March
21, 1983, to Dean Witter Industry-Valued Securities Inc. On April 30, 1987,
the Fund reorganized as a Massachusetts business trust with the name Dean
Witter American Value Fund.
THE INVESTMENT MANAGER
Dean Witter InterCapital Inc. (the "Investment Manager" or
"InterCapital"), a Delaware corporation, whose address is Two World Trade
Center, New York, New York 10048, is the Fund's Investment Manager.
InterCapital is a wholly-owned subsidiary of Morgan Stanley Dean Witter & Co.
("MSDW"), a Delaware corporation. In an internal reorganization which took
place in January, 1993, InterCapital assumed the investment advisory,
administrative and management activities previously performed by the
InterCapital Division of Dean Witter Reynolds Inc. ("DWR"), a broker-dealer
affiliate of InterCapital. (As hereinafter used in this Statement of
Additional Information, the terms "InterCapital" and "Investment Manager"
refer to DWR's InterCapital Division prior to the internal reorganization and
Dean Witter InterCapital Inc. thereafter.) The daily management of the Fund
and research relating to the Fund's portfolio is conducted by or under the
direction of officers of the Fund and of the Investment Manager, subject to
review by the Fund's Board of Trustees. Information as to these Trustees and
officers is contained under the caption "Trustees and Officers."
InterCapital is the investment manager or investment adviser of the
following investment companies: Dean Witter Liquid Asset Fund Inc.,
InterCapital Income Securities Inc., InterCapital Insured Municipal Bond
Trust, InterCapital Quality Municipal Investment Trust, InterCapital Insured
Municipal Trust, InterCapital Quality Municipal Income Trust, InterCapital
Insured Municipal Income Trust, InterCapital California Insured Municipal
Income Trust, InterCapital Quality Municipal Securities, InterCapital
California Quality Municipal Securities, InterCapital New York Quality
Municipal Securities, InterCapital Insured Municipal Securities, InterCapital
California Insured Municipal Securities, Dean Witter High Yield Securities
Inc., Dean Witter Tax-Free Daily Income Trust, Dean Witter Developing Growth
Securities Trust, Dean Witter Tax-Exempt Securities Trust, Dean Witter
Natural Resource Development Securities Inc., Dean Witter Dividend Growth
Securities Inc., Dean Witter American Value Fund, Dean Witter U.S. Government
Money Market Trust, Dean Witter Variable Investment Series, Dean Witter World
Wide Investment Trust, Dean Witter Select Municipal Reinvestment Fund, Dean
Witter U.S. Government Securities Trust, Dean Witter California Tax-Free
Income Fund, Dean Witter New York Tax-Free Income Fund, Dean Witter
Convertible Securities Trust, Dean Witter Federal Securities Trust, Dean
Witter Value-Added Market Series, High Income Advantage Trust, High Income
Advantage Trust II, High Income Advantage Trust III, Dean Witter Government
Income Trust, Dean Witter Utilities Fund, Dean Witter California Tax-Free
Daily Income Trust, Dean Witter Strategist Fund, Dean Witter World Wide
Income Trust, Dean Witter Intermediate Income Securities, Dean Witter New
York Municipal Money Market Trust, Dean Witter Capital Growth Securities,
Dean Witter European Growth Fund Inc., Dean Witter Precious Metals and
Minerals Trust, Dean Witter Global Short-Term Income Fund Inc., Dean Witter
Pacific Growth Fund Inc., Dean Witter Multi-State Municipal Series Trust,
Dean Witter Short-Term U.S. Treasury Trust, Dean Witter Health Sciences
Trust, Dean Witter Retirement Series, Dean Witter Limited Term Municipal
Trust, Dean Witter Short-Term Bond Fund, Dean Witter Global Dividend Growth
Securities, Dean Witter Global Utilities Fund, Dean Witter International
Small Cap Fund, Dean Witter Mid-Cap Growth Fund, Dean Witter Select
Dimensions Investment Series, Dean Witter Global Asset Allocation Fund, Dean
Witter Balanced Growth Fund, Dean Witter Balanced Income Fund, Dean Witter
Hawaii Municipal Trust, Dean Witter Capital Appreciation Fund, Dean Witter
Intermediate Term U.S. Treasury Trust, Dean Witter Japan Fund, Dean Witter
Income Builder Fund, Dean Witter Special Value Fund, Dean Witter Financial
Services Trust, Dean Witter Market Leader Trust, Dean Witter Information
Fund, Dean Witter S&P 500 Index Fund, Dean Witter Fund of Funds, Morgan
Stanley Dean Witter Competitive Edge Fund--"Best Ideas" Portfolio, Morgan
Stanley Dean Witter Growth Fund, Morgan
3
<PAGE>
Stanley Dean Witter Mid-Cap Dividend Growth Securities, Active Assets Money
Trust, Active Assets Tax-Free Trust, Active Assets California Tax-Free Trust,
Active Assets Government Securities Trust, Municipal Income Trust, Municipal
Income Trust II, Municipal Income Trust III, Municipal Income Opportunities
Trust, Municipal Income Opportunities Trust II, Municipal Income
Opportunities Trust III, Prime Income Trust and Municipal Premium Income
Trust. The foregoing investment companies, together with the Fund, are
collectively referred to as the Dean Witter Funds.
In addition, Dean Witter Services Company Inc. ("DWSC"), a wholly-owned
subsidiary of InterCapital, serves as manager for the following companies for
which TCW Funds Management, Inc. is the investment adviser: TCW/DW North
American Government Income Trust, TCW/DW Latin American Growth Fund, TCW/DW
Income and Growth Fund, TCW/DW Small Cap Growth Fund, TCW/DW Total Return
Trust, TCW/DW Mid-Cap Equity Trust, TCW/DW Global Telecom Trust, TCW/DW
Emerging Market Opportunities Trust, TCW/DW Term Trust 2000, TCW/DW Term
Trust 2002 and TCW/DW Term Trust 2003 (the "TCW/DW Funds"). InterCapital also
serves as (i) administrator of The Black Rock Strategic Term Trust Inc., a
closed-end investment company; (ii) sub-administrator of Templeton Global
Governments Income Trust, a closed-end investment company; and (iii)
investment advisor of Offshore Dividend Growth Fund and Offshore Money Market
Fund, mutual funds established under the laws of the Cayman Islands and
available only to investors who are participants in DWR's International
Active Assets Account program and are neither citizens nor residents of the
United States.
Pursuant to an Investment Management Agreement (the "Agreement") with the
Investment Manager, the Fund has retained the Investment Manager to manage
the investment of the Fund's assets, including the placing of orders for the
purchase and sale of portfolio securities. The Investment Manager obtains and
evaluates such information and advice relating to the economy, securities
markets, and specific securities as it considers necessary or useful to
continuously manage the assets of the Fund in a manner consistent with its
investment objective.
Under the terms of the Agreement, in addition to managing the Fund's
investments, the Investment Manager maintains certain of the Fund's books and
records and furnishes, at its own expense, such office space, facilities,
equipment, clerical help, bookkeeping and certain legal services as the Fund
may reasonably require in the conduct of its business, including the
preparation of prospectuses, proxy statements and reports required to be
filed with federal and state securities commissions (except insofar as the
participation or assistance of independent accountants and attorneys is, in
the opinion of the Investment Manager, necessary or desirable). In addition,
the Investment Manager pays the salaries of all personnel, including officers
of the Fund, who are employees of the Investment Manager. The Investment
Manager also bears the cost of telephone service, heat, light, power and
other utilities provided to the Fund.
Effective December 31, 1993, pursuant to a Services Agreement between
InterCapital and DWSC, DWSC began to provide the administrative services to
the Fund which were previously performed directly by InterCapital. On April
17, 1995, DWSC was reorganized in the State of Delaware, necessitating the
entry into a new Services Agreement by InterCapital on that date. The
foregoing internal reorganizations did not result in any change in the nature
or scope of the administrative services being provided to the Fund or any of
the fees being paid by the Fund for the overall services being performed
under the terms of the existing Management Agreement.
Expenses not expressly assumed by the Investment Manager under the
Agreement or by the Distributor of the Fund's shares, Dean Witter
Distributors Inc. ("Distributors" or the "Distributor") (see "The
Distributor") will be paid by the Fund. These expenses will be allocated
among the four classes of shares of the Fund (each, a "Class") 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 (the "12b-1 fee") (see "The
Distributor"); 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'
4
<PAGE>
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 (not
including compensation or expenses of attorneys who are employees of the
Investment Manager); 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.
As full compensation for the services and facilities furnished to the Fund
and expenses of the Fund assumed by the Investment Manager, the Fund pays the
Investment Manager monthly compensation calculated daily by applying the
following annual rates to the net assets of the Fund determined as of the
close of each business day: 0.625% of the portion of daily net assets not
exceeding $250 million; 0.50% of the portion of daily net assets exceeding
$250 million but not exceeding $2.5 billion; 0.475% of the portion of daily
net assets exceeding $2.5 billion but not exceeding $3.5 billion; 0.45% of
the portion of daily net assets exceeding $3.5 billion but not exceeding $4.5
billion; and 0.425% of the portion of daily net assets exceeding $4.5
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 fiscal years
ended December 31, 1995, 1996 and 1997, the Fund accrued to the Investment
Manager total compensation under the Agreement in the amounts of $9,736,912,
$14,111,045 and $18,075,407, respectively.
The Agreement provides that in the absence of willful misfeasance, bad
faith, gross negligence or reckless disregard of its obligations thereunder,
the Investment Manager is not liable to the Fund or any of its investors for
any act or omission by the Investment Manager or for any losses sustained by
the Fund or its investors. The Agreement in no way restricts the Investment
Manager from acting as investment manager or adviser to others.
The Agreement was initially approved by the Board of Trustees on February
21, 1997 and by the shareholders of the Fund at a Special Meeting of
Shareholders held on May 21, 1997. The Agreement is substantially identical
to a prior investment management agreement which was initially approved by
the Board of Trustees on October 30, 1992 and by the shareholders of the Fund
at a Special Meeting of Shareholders held on January 12, 1993, as such
agreement had been amended by the Board of Trustees at their meeting held on
April 24, 1997 to provide a breakpoint in the management fee that reduced the
compensation received by the Investment Manager under the agreement on assets
exceeding $3.5 billion. The Agreement took effect on May 31, 1997 upon the
consummation of the merger of Dean Witter, Discover & Co. with Morgan Stanley
Group Inc. The Agreement may be terminated at any time, without penalty, on
thirty days' notice by the Board of Trustees of the Fund, by the holders of a
majority, as defined in the Investment Company Act of 1940 (the "Act"), of
the outstanding shares of the Fund, or by the Investment Manager. The
Agreement will automatically terminate in the event of its assignment (as
defined in the Act).
Under its terms, the Agreement has an initial term ending April 30, 1999
and will remain in effect from year to year thereafter, provided continuance
of the Agreement is approved at least annually by the vote of the holders of
a majority, as defined in the Act, of the outstanding shares of the Fund, or
by the Board of Trustees of the Fund; provided that in either event such
continuance is approved annually by the vote of a majority of the Trustees of
the Fund who are not parties to the Agreement or "interested persons" (as
defined in the Act) of any such party (the "Independent Trustees"), which
vote must be cast in person at a meeting called for the purpose of voting on
such approval.
The following owned 5% or more of the outstanding shares of Class A on
March 31, 1998: Morgan Stanley Dean Witter Trust FSB as Trustee for Trayco of
SC INC. 401K & Profit Sharing Plan, P.O. Box
5
<PAGE>
957, Jersey City, NJ 07303-0957; Morgan Stanley Dean Witter Trust FSB as
Trustee for Fenner Inc., P.O. Box 957, Jersey City, NJ 07303-0957; Morgan
Stanley Dean Witter Trust FSB as Trustee for Ashcraft & Gerel Target Benefit
Plan, P.O. Box 957, Jersey City, NJ 07303-0957; Morgan Stanley Dean Witter
Trust FSB as Trustee for Robinson Nugent Inc. Profit Sharing 401K Plan, P.O.
Box 957, Jersey City, NJ 07303-0957. The following owned 5% or more of the
outstanding shares of Class D on March 31, 1998: Mellon Bank, N.A., A/C DWRF
8604862, Mellon Bank N.A., Mutual Funds Operations, P.O. Box 3198,
Pittsburgh, PA 15230-3198.
The Fund has acknowledged that the name "Dean Witter" is a property right
of DWR. The Fund has agreed that DWR or its parent company may use or, at any
time, permit others to use, the name "Dean Witter." The Fund has also agreed
that, in the event the Agreement is terminated, or if the affiliation between
InterCapital and its parent is terminated, the Fund will eliminate the name
"Dean Witter" from its name if DWR or its parent company shall so request.
TRUSTEES AND OFFICERS
- -----------------------------------------------------------------------------
The Trustees and Executive Officers of the Fund, their principal business
occupations during the last five years and their affiliations, if any, with
InterCapital, and with the 83 Dean Witter Funds and the 14 TCW/DW Funds, are
shown below.
<TABLE>
<CAPTION>
NAME, AGE, POSITION WITH FUND AND ADDRESS PRINCIPAL OCCUPATIONS DURING LAST FIVE YEARS
- -------------------------------------------- ---------------------------------------------------------
<S> <C>
Michael Bozic (57) Chairman and Chief Executive Officer of Levitz Furniture
Trustee Corporation (since November, 1995); Director or Trustee
c/o Levitz Furniture Corporation of the Dean Witter Funds; formerly President and Chief
6111 Broken Sound Parkway, N.W. Executive Officer of Hills Department Stores (May,
Boca Raton, Florida 1991-July, 1995); formerly variously Chairman, Chief
Executive Officer, President and Chief Operating Officer
(1987-1991) of the Sears Merchandise Group of Sears,
Roebuck and Co.; Director of Eaglemark Financial
Services, Inc. and Weirton Steel Corporation.
Charles A. Fiumefreddo* (64) Chairman, Chief Executive Officer and Director of
Chairman, President, Chief Executive InterCapital, Dean Witter Distributors Inc.
Officer and Trustee ("Distributors") and Dean Witter Trust Company ("DWSC");
Two World Trade Center Director and Executive Vice President of DWR; Chairman,
New York, New York Director or Trustee, President and Chief Executive
Officer of the Dean Witter Funds; Chairman, Chief
Executive Officer and Trustee of the TCW/DW Funds;
Chairman and Director of Morgan Stanley Dean Witter Trust
FSB ("MSDW Trust"); Director and/or officer of various
MSDW subsidiaries.
6
<PAGE>
NAME, AGE, POSITION WITH FUND AND ADDRESS PRINCIPAL OCCUPATIONS DURING LAST FIVE YEARS
- -------------------------------------------- ---------------------------------------------------------
Edwin J. Garn (65) Director or Trustee of the Dean Witter Funds; formerly
Trustee United States Senator (R-Utah)(1974-1992) and Chairman,
c/o Huntsman Corporation Senate Banking Committee (1980-1986); formerly Mayor of
500 Huntsman Way Salt Lake City, Utah (1971-1974); formerly Astronaut,
Salt Lake City, Utah Space Shuttle Discovery (April 12-19, 1985); Vice
Chairman, Huntsman Corporation; Director of Franklin
Covey (time management systems), John Alden Financial
Corp. (health insurance), United Space Alliance (joint
venture between Lockheed Martin and the Boeing Company)
and Nuskin Asia Pacific (multilevel marketing); member of
the board of various civic and charitable organizations.
John R. Haire (73) Chairman of the Audit Committee and Chairman of the
Trustee Committee of the Independent Directors or Trustees and
Two World Trade Center Director or Trustee of the Dean Witter Funds; Chairman of
New York, New York the Audit Committee and Chairman of the Committee of the
Independent Trustees and Trustee of the TCW/DW Funds;
formerly President, Council for Aid to Education
(1978-1989) and Chairman and Chief Executive Officer of
Anchor Corporation, an Investment Adviser (1964-1978).
Wayne E. Hedien (64) Retired; Director or Trustee of the Dean Witter Funds;
Trustee Director of The PMI Group, Inc. (private mortgage
c/o Gordon Altman Butowsky insurance); Trustee and Vice Chairman of The Field Museum
Weitzen Shalov & Wein of Natural History; formerly associated with the Allstate
Counsel to the Independent Trustees Companies (1966-1994), most recently as Chairman of The
114 West 47th Street Allstate Corporation (March, 1993-December, 1994) and
New York, New York Chairman and Chief Executive Officer of its wholly-owned
subsidiary, Allstate Insurance Company (July,
1989-December, 1994); director of various other business
and charitable organizations.
Dr. Manuel H. Johnson (49) Senior Partner, Johnson Smick International, Inc., a
Trustee consulting firm; Co-Chairman and a founder of the Group
c/o Johnson Smick International, Inc. of Seven Council (G7C), an international economic
1133 Connecticut Avenue, N.W. commission; Director or Trustee of the Dean Witter Funds;
Washington, D.C. Trustee of the TCW/DW Funds; Director of NASDAQ (since
June, 1995); Director of Greenwich Capital Markets, Inc.
(broker-dealer) 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
(1986-1990) and Assistant Secretary of the U.S. Treasury.
7
<PAGE>
NAME, AGE, POSITION WITH FUND AND ADDRESS PRINCIPAL OCCUPATIONS DURING LAST FIVE YEARS
- -------------------------------------------- ---------------------------------------------------------
Michael E. Nugent (61) General Partner, Triumph Capital, L.P., a private
Trustee investment partnership (since April, 1988); Director or
c/o Triumph Capital, L.P. Trustee of the Dean Witter Funds; Trustee of the TCW/DW
237 Park Avenue Funds; formerly Vice President, Bankers Trust Company and
New York, New York BT Capital Corporation (1984-1988); director of various
business organizations.
Philip J. Purcell* (54) Chairman of the Board of Directors and Chief Executive
Trustee Officer of MSDW, DWR and Novus Credit Services Inc.;
1585 Broadway Director of InterCapital, DWSC and Distributors; Director
New York, New York or Trustee of the Dean Witter Funds; Director and/or
officer of various MSDW subsidiaries.
John L. Schroeder (67) Retired; Director or Trustee of the Dean Witter Funds;
Trustee Trustee of the TCW/DW Funds; Director of Citizens
c/o Gordon Altman Butowsky Utilities Company; formerly Executive Vice President and
Weitzen Shalov & Wein Chief Investment Officer of the Home Insurance Company
Counsel to the Independent Trustees (August, 1991-September, 1995).
114 West 47th Street
New York, New York
Barry Fink (43) Senior Vice President (since March, 1997) and Secretary
Vice President, and General Counsel (since February, 1997) of
Secretary and General Counsel InterCapital and DWSC; Senior Vice Pres ident (since
Two World Trade Center March, 1997) and Assistant Secretary and Assistant
New York, New York General Counsel (since February, 1997) of Distributors;
Assistant Secretary of DWR (since August, 1996); Vice
President, Secretary and General Counsel of the Dean
Witter Funds and the TCW/DW Funds (since February, 1997);
previously First Vice President (June, 1993-February,
1997), Vice President (until June, 1993) and Assistant
Secretary and Assistant General Counsel of InterCapital
and DWSC and Assistant Secretary of the Dean Witter Funds
and the TCW/DW Funds.
Anita H. Kolleeny (42) Senior Vice President of InterCapital; Vice President of
Vice President various Dean Witter Funds.
Two World Trade Center
New York, New York
Thomas F. Caloia (52) First Vice President and Assistant Treasurer of
Treasurer InterCapital and DWSC; Treasurer of the Dean Witter Funds
Two World Trade Center and TCW/DW Funds.
New York, New York
</TABLE>
- ------------
* Denotes Trustees who are "interested persons" of the Fund, as defined in
the Act.
In addition, Mitchell M. Merin, President and Chief Strategic Officer of
InterCapital and DWSC, Executive Vice President of Distributors and MSDW
Trust and Director of MSDW Trust, Executive Vice President and Director of
DWR, and Director of SPS Transaction Services, Inc. and various other MSDW
subsidiaries, Robert M. Scanlan, President of InterCapital and Chief
Operating Officer of InterCapital and DWSC, Executive Vice President of
Distributors and MSDW Trust and Director of MSDW Trust, Joseph
8
<PAGE>
J. McAlinden, Executive Vice President and Chief Investment Officer of
InterCapital and Director of MSDW Trust, Robert S. Giambrone, Senior Vice
President of InterCapital, DWSC, Distributors and MSDW Trust and Director of
MSDW Trust, and Kenton J. Hinchliffe, Ira N. Ross, Paul D. Vance, Senior Vice
Presidents of InterCapital and Michelle Kaufman, Vice President of
InterCapital, are Vice Presidents of the Fund. In addition, Marilyn K.
Cranney, First Vice President and Assistant General Counsel of InterCapital
and DWSC, Lou Anne D. McInnis, Ruth Rossi and Carsten Otto, Vice Presidents
and Assistant General Counsels of InterCapital and DWSC, and Frank
Bruttomesso and Todd Lebo, staff attorneys with InterCapital, are Assistant
Secretaries of the Fund.
THE BOARD OF TRUSTEES, THE INDEPENDENT TRUSTEES, AND THE COMMITTEES
The Board of Trustees consists of nine (9) trustees. These same
individuals also serve as directors or trustees for all of the Dean Witter
Funds, and are referred to in this section as Trustees. As of the date of
this Statement of Additional Information, there are a total of 86 Dean Witter
Funds, comprised of 130 portfolios. As of March 31, 1998, the Dean Witter
Funds had total net assets of approximately $105 billion and more than six
million shareholders.
Seven Trustees (77% of the total number) have no affiliation or business
connection with InterCapital or any of its affiliated persons and do not own
any stock or other securities issued by InterCapital's parent company, MSDW.
These are the "disinterested" or "independent" Trustees. The other two
Trustees (the "management Trustees") are affiliated with InterCapital. Four
of the seven independent Trustees are also Independent Trustees of the TCW/DW
Funds.
Law and regulation establish both general guidelines and specific duties
for the Independent Trustees. The Dean Witter Funds seek as Independent
Trustees individuals of distinction and experience in business and finance,
government service or academia; these are people whose advice and counsel are
in demand by others and for whom there is often competition. To accept a
position on the Funds' Boards, such individuals may reject other attractive
assignments because the Funds make substantial demands on their time. Indeed,
by serving on the Funds' Boards, certain Trustees who would otherwise be
qualified and in demand to serve on bank boards would be prohibited by law
from doing so.
All of the Independent Trustees serve as members of the Audit Committee
and the Committee of the Independent Trustees. Three of them also serve as
members of the Derivatives Committee. During the calendar year ended December
31, 1997, the three Committees held a combined total of seventeen meetings.
The Committees hold some meetings at InterCapital's offices and some outside
InterCapital. Management Trustees or officers do not attend these meetings
unless they are invited for purposes of furnishing information or making a
report.
The Committee of the Independent Trustees is charged with recommending to
the full Board approval of management, advisory and administration contracts,
Rule 12b-1 plans and distribution and underwriting agreements; continually
reviewing Fund performance; checking on the pricing of portfolio securities,
brokerage commissions, transfer agent costs and performance, and trading
among Funds in the same complex; and approving fidelity bond and related
insurance coverage and allocations, as well as other matters that arise from
time to time. The Independent Trustees are required to select and nominate
individuals to fill any Independent Trustee vacancy on the Board of any Fund
that has a Rule 12b-1 plan of distribution. Most of the Dean Witter Funds
have such a plan.
The Audit Committee is charged with recommending to the full Board the
engagement or discharge of the Fund's independent accountants; directing
investigations into matters within the scope of the independent accountants'
duties, including the power to retain outside specialists; reviewing with the
independent accountants the audit plan and results of the auditing
engagement; approving professional services provided by the independent
accountants and other accounting firms prior to the performance of such
services; reviewing the independence of the independent accountants;
considering the range of audit and non-audit fees; reviewing the adequacy of
the Fund's system of internal controls; and preparing and submitting
Committee meeting minutes to the full Board.
Finally, the Board of each Fund has formed a Derivatives Committee to
establish parameters for and oversee the activities of the Fund with respect
to derivative investments, if any, made by the Fund.
9
<PAGE>
DUTIES OF CHAIRMAN OF COMMITTEE OF THE INDEPENDENT TRUSTEES AND AUDIT
COMMITTEE
The Chairman of the Committee of the Independent Trustees and the Audit
Committee maintains an office at the Funds' headquarters in New York. He is
responsible for keeping abreast of regulatory and industry developments and
the Funds' operations and management. He screens and/or prepares written
materials and identifies critical issues for the Independent Trustees to
consider, develops agendas for Committee meetings, determines the type and
amount of information that the Committees will need to form a judgment on
various issues, and arranges to have that information furnished to Committee
members. He also arranges for the services of independent experts and
consults with them in advance of meetings to help refine reports and to focus
on critical issues. Members of the Committees believe that the person who
serves as Chairman of both Committees and guides their efforts is pivotal to
the effective functioning of the Committees.
The Chairman of the Committees also maintains continuous contact with the
Funds' management, with independent counsel to the Independent Trustees and
with the Funds' independent auditors. He arranges for a series of special
meetings involving the annual review of investment advisory, management and
other operating contracts of the Funds and, on behalf of the Committees,
conducts negotiations with the Investment Manager and other service
providers. In effect, the Chairman of the Committees serves as a combination
of chief executive and support staff of the Independent Trustees.
The Chairman of the Committee of the Independent Trustees and the Audit
Committee is not employed by any other organization and devotes his time
primarily to the services he performs as Committee Chairman and Independent
Trustee of the Dean Witter Funds and as an Independent Trustee and as
Chairman of the Committee of the Independent Trustees and the Audit Committee
of the TCW/DW Funds. The current Committee Chairman has had more than 35
years experience as a senior executive in the investment company industry.
ADVANTAGES OF HAVING SAME INDIVIDUALS AS INDEPENDENT TRUSTEES FOR ALL DEAN
WITTER FUNDS
The Independent Trustees and the Funds' management believe that having the
same Independent Trustees for each of the Dean Witter Funds avoids the
duplication of effort that would arise from having different groups of
individuals serving as Independent Trustees for each of the Funds or even of
sub-groups of Funds. They believe that having the same individuals serve as
Independent Trustees of all the Funds tends to increase their knowledge and
expertise regarding matters which affect the Fund complex generally and
enhances their ability to negotiate on behalf of each Fund with the Fund's
service providers. This arrangement also precludes the possibility of
separate groups of Independent Trustees arriving at conflicting decisions
regarding operations and management of the Funds and avoids the cost and
confusion that would likely ensue. Finally, having the same Independent
Trustees serve on all Fund Boards enhances the ability of each Fund to
obtain, at modest cost to each separate Fund, the services of Independent
Trustees, and a Chairman of their Committees, of the caliber, experience and
business acumen of the individuals who serve as Independent Trustees of the
Dean Witter Funds.
COMPENSATION OF INDEPENDENT TRUSTEES
The Fund pays each Independent Trustee an annual fee of $800 plus a per
meeting fee of $50 for meetings of the Board of Trustees or committees of the
Board of Trustees attended by the Trustee (the Fund pays the Chairman of the
Audit Committee an annual fee of $750 and pays the Chairman of the Committee
of the Independent Trustees an additional annual fee of $1,200). If a Board
meeting and a Committee meeting, or more than one Committee meeting, take
place on a single day, the Trustees are paid a single meeting fee by the
Fund. The Fund 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.
The following table illustrates the compensation paid to the Fund's
Independent Trustees by the Fund for the fiscal year ended December 31, 1997.
10
<PAGE>
FUND COMPENSATION
<TABLE>
<CAPTION>
AGGREGATE
NAME OF INDEPENDENT COMPENSATION
TRUSTEE FROM THE FUND
- --------------------------- ---------------
<S> <C>
Michael Bozic ............. $1,650
Edwin J. Garn ............. 1,850
John R. Haire ............. 3,800
Wayne E. Hedien............ 482
Dr. Manuel H. Johnson .... 1,800
Michael E. Nugent ......... 1,850
John L. Schroeder.......... 1,850
</TABLE>
The following table illustrates the compensation paid to the Fund's
Independent Trustees for the calendar year ended December 31, 1997 for
services to the 84 Dean Witter Funds and, in the case of Messrs. Haire,
Johnson, Nugent and Schroeder, the 14 TCW/DW Funds that were in operation at
December 31, 1997. With respect to Messrs. Haire, Johnson, Nugent and
Schroeder, the TCW/DW Funds are included solely because of a limited exchange
privilege between those Funds and five Dean Witter Money Market Funds. Mr.
Hedien's term as Director or Trustee of each Dean Witter Fund commenced on
September 1, 1997.
CASH COMPENSATION FROM DEAN WITTER FUNDS AND TCW/DW FUNDS
<TABLE>
<CAPTION>
FOR SERVICE AS
CHAIRMAN OF
COMMITTEES OF FOR SERVICE AS
INDEPENDENT CHAIRMAN OF
FOR SERVICE DIRECTORS/ COMMITTEES OF TOTAL CASH
AS DIRECTOR OR FOR SERVICE AS TRUSTEES AND INDEPENDENT COMPENSATION
TRUSTEE AND TRUSTEE AND AUDIT TRUSTEES FOR SERVICES TO
COMMITTEE MEMBER COMMITTEE MEMBER COMMITTEES OF 84 AND AUDIT 84 DEAN WITTER
NAME OF OF 84 DEAN WITTER OF 14 TCW/DW DEAN WITTER COMMITTEES OF 14 FUNDS AND 14
INDEPENDENT TRUSTEE FUNDS FUNDS FUNDS TCW/DW FUNDS TCW/DW FUNDS
- --------------------- ----------------- ---------------- ---------------- ---------------- ---------------
<S> <C> <C> <C> <C> <C>
Michael Bozic ........ $133,602 -- -- -- $133,602
Edwin J. Garn ........ 149,702 -- -- -- 149,702
John R. Haire ........ 149,702 $73,725 $157,463 $25,350 406,240
Wayne E. Hedien....... 39,010 -- -- -- 39,010
Dr. Manuel H. Johnson 145,702 71,125 -- -- 216,827
Michael E. Nugent ... 149,702 73,725 -- -- 223,427
John L. Schroeder .... 149,702 73,725 -- -- 223,427
</TABLE>
As of the date of this Statement of Additional Information, 57 of the Dean
Witter Funds, including the Fund, have adopted a retirement program under
which an Independent Trustee who retires after serving for at least five
years (or such lesser period as may be determined by the Board) as an
Independent Director or Trustee of any Dean Witter Fund that has adopted the
retirement program (each such Fund referred to as an "Adopting Fund" and each
such Trustee referred to as an "Eligible Trustee") is entitled to retirement
payments upon reaching the eligible retirement age (normally, after attaining
age 72). Annual payments are based upon length of service. Currently, upon
retirement, each Eligible Trustee is entitled to receive from the Adopting
Fund, commencing as of his or her retirement date and continuing for the
remainder of his or her life, an annual retirement benefit (the "Regular
Benefit") equal to 29.41% of his or her Eligible Compensation plus 0.4901667%
of such Eligible Compensation for each full month of service as an
Independent Director or Trustee of any Adopting Fund in excess of five years
up to a maximum of 58.82% after ten years of service. The foregoing
percentages may be changed by the Board.(1) "Eligible Compensation" is
one-fifth of the total compensation earned by such Eligible Trustee for
service to the Adopting Fund in the five year period prior to the date of the
Eligible Trustee's retirement. Benefits under the retirement program are not
secured or funded by the Adopting Funds.
(1) An Eligible Trustee may elect alternate payments of his or her
retirement benefits based upon the combined life expectancy of such
Eligible Trustee and his or her spouse on the date of such Eligible
Trustee's retirement. The amount estimated to be payable under this
method, through the remainder of the later of the lives of such
Eligible Trustee and spouse, will be the actuarial equivalent of the
Regular Benefit. In addition, the Eligible Trustee may elect that the
surviving spouse's periodic payment of benefits will be equal to either
50% or 100% of the previous periodic amount, an election that,
respectively, increases or decreases the previous periodic amount so
that the resulting payments will be the actuarial equivalent of the
Regular Benefit.
11
<PAGE>
The following table illustrates the retirement benefits accrued to the
Fund's Independent Trustees by the Fund for the fiscal year ended December,
31 1997 and by the 57 Dean Witter Funds (including the Fund) for the year
ended December 31, 1997, and the estimated retirement benefits for the Fund's
Independent Trustees, to commence upon their retirement, from the Fund as of
December 31, 1997 and from the 57 Dean Witter Funds as of December 31, 1997.
RETIREMENT BENEFITS FROM THE FUND AND ALL DEAN WITTER FUNDS
<TABLE>
<CAPTION>
FOR ALL ADOPTING FUNDS
--------------------------------
ESTIMATED ANNUAL
RETIREMENT BENEFITS BENEFITS
ACCRUED AS EXPENSES UPON RETIREMENT(2)
----------------------- -------------------
ESTIMATED
CREDITED
YEARS ESTIMATED
OF SERVICE AT PERCENTAGE OF BY ALL FROM FROM ALL
NAME OF INDEPENDENT RETIREMENT ELIGIBLE BY THE ADOPTING THE ADOPTING
TRUSTEE (MAXIMUM 10) COMPENSATION FUND FUNDS FUND FUNDS
- -------------------------- --------------- --------------- -------- ------------- ------- ----------
<S> <C> <C> <C> <C> <C> <C>
Michael Bozic ............. 10 58.82% $ 370 $ 20,499 $ 925 $ 55,026
Edwin J. Garn ............. 10 58.82 616 30,878 925 55,026
John R. Haire ............. 10 58.82 (445) (19,823)(3) 2,246 132,002
Wayne E. Hedien............ 9 50.00 0 0 786 46,772
Dr. Manuel H. Johnson .... 10 58.82 248 12,832 925 55,026
Michael E. Nugent ......... 10 58.82 465 22,546 925 55,026
John L. Schroeder.......... 8 49.02 709 39,350 771 46,123
</TABLE>
(2) Based on current levels of compensation. Amount of annual benefits also
varies depending on the Trustee's elections described in Footnote (1)
above.
(3) This number reflects the effect of the extension of Mr. Haire's term as
Director or Trustee until May 1, 1999.
As of the date of this Statement of Additional Information, the aggregate
number of shares of beneficial interest of the Fund owned by the Fund's
officers and Trustees as a group was less than 1 percent of the Fund's shares
of beneficial interest outstanding.
INVESTMENT PRACTICES AND POLICIES
- -----------------------------------------------------------------------------
As discussed in the Prospectus, the Fund offers investors an opportunity
to participate in a diversified portfolio of securities, consisting
principally of common stocks. The portfolio reflects an investment
decision-making process developed by the Fund's Investment Manager.
INDUSTRY VALUATION APPROACH
As stated in the Prospectus, in managing the Fund's portfolio the
Investment Manager generally seeks to identify industries, rather than
individual companies, as prospects for capital appreciation. This approach is
designed to capitalize on the basic assumptions that industry trends are a
primary force governing company earnings; conventional forecasts may not
fully reflect underlying industry conditions or changing economic cycles; the
market's perception of industry trends is often transitory or exaggerated;
and distortions in relative valuations beyond their normal ranges may provide
significant buying or selling opportunities.
The Investment Manager generally seeks to invest assets of the Fund in
industries it considers to exhibit underappreciated earnings potential at the
time of purchase and to sell those it considers to have peaked in relative
earnings potential.
The Investment Manager also uses models which employ economic indicators
or other financial variables to evaluate the relative attractiveness of
industries. Economic analysis includes traditional business cycle analysis
and such signposts as current Federal Reserve monetary posture, direction of
commodity prices, and global currency and economic trends. Economic
indicators most relevant to particular industries are reviewed. Some
industries analyzed, such as aerospace and energy, do not correlate with
economic indicators and must be analyzed relative to their respective
specific industry
12
<PAGE>
cycles. Financial variables under consideration may include corporate
earnings growth and cashflow, corporate and industry asset valuation,
absolute and relative price/earnings ratios and dividend discount valuations.
Once attractive industries have been identified, stocks to represent those
industries are selected utilizing a multivariate process that includes size
and quality of the company, earnings visibility of the company and various
valuation parameters. Valuation screens may include dividend discount model
values, price-to-book ratios, price to cashflow values, relative and absolute
price-to-earnings ratios and ratios of price to earnings multiples to
earnings growth. Price and earnings momentum ratings derived from external
sources are also factored into the stock selection decision. The Investment
Manager also evaluates fundamental company criteria such as product cycle
analysis, revenue growth, margin analysis, consistency of earnings
profitability, proprietary nature of the product and quality of management.
Stocks may be selected from the three capitalization tiers of the market:
large capitalization, medium capitalization, and small capitalization.
Based on the sum total of this analysis, approximately 40-60 industries
are studied and classified as attractive, moderately attractive or
unattractive. Attractive groups are purchased, moderately attractive groups
are bought or held, and unattractive groups are sold. The Investment Manager
may utilize services that examine historical industry relative
price-to-earnings ranges for input on the Investment Manager's valuation
analysis.
A basic tenet of the industry valuation approach is that there is no
certainty of superior performance in any specific industry selection, but
rather that approximately equal weighting of investments in a group of
industries, each of which has been identified as underappreciated, can
benefit from the performance probabilities of the total group.
The foregoing represents the main outlines of the industry valuation
approach. The following describes its key features, all of which are subject
to modification as described below or as result of applying the asset
allocation disciplines described later.
1. Equal Industry Weightings.
After determining the industries that it considers to be attractive, the
Investment Manager generally attempts to invest approximately equal amounts
of the equity portion of the portfolio in securities of companies in each of
such industries, subject to adjustment for company weightings as set forth in
the next paragraph.
2. Equal Company Weightings.
From the total of all companies included in the industry valuation
process, the Investment Manager selects a limited number from each industry
as representative of that industry. Such selections are made on the basis of
various criteria, including size and quality of a company, the visibility of
earnings, product cycle analysis, historic track record and various valuation
parameters. Valuation screens may include dividend discount model values,
price-to-book ratios, price-to-cashflow values, relative and absolute
price-to-earnings ratios and ratios of price-earnings multiples to earnings
growth. Price and earnings momentum ratings derived from external sources are
also factored into the stock selection decision. Those companies which are in
attractive industries and which the Investment Manager believes to be
attractive investments are finally selected for inclusion in the portfolio.
When final selections are made, approximately equal amounts of the equity
portion of the portfolio are invested in each of such companies. This may
vary depending on whether the Investment Manager is in the process of
building or reducing a stock position. Consideration will also be given to
valuation; capitalization and liquidity profile. Stocks in industries not
characterized as attractive may be underweighted. Also, smaller
capitalization issues may not be equally weighted due to liquidity
considerations.
3. Relative Industry Values.
Industry selection only attempts to identify industries whose securities
might be expected to perform relatively better than the market as represented
by the S&P Index. It does not seek to identify securities which will
experience an absolute increase in value notwithstanding market conditions.
However, the process assumes that, despite interim fluctuations in stock
market prices, the long-term trend in equity security values will be up.
13
<PAGE>
4. Practical Applications.
In applying the industry valuation approach to management of the portfolio
of the Fund, the Investment Manager will make adjustments in the portfolio
which reflect modifications of the underlying concepts whenever, in its
opinion, such adjustments are necessary or desirable to achieve the Fund's
objectives. Such adjustments may include, for example, weighting some
industries or companies more or less than others, based upon the Investment
Manager's judgment as to the investment merits of specific companies. In
addition, without specific action by the Investment Manager, adjustments may
result from fluctuations in market prices which distort previously
established industry and company weightings. The portfolio may, at times,
include securities of industries which are considered unattractive due to
consideration of stage-of-cycle analysis or may not include representation in
industries considered attractive due to considerations such as valuation
criteria, stage-of-cycle analysis or lack of earnings visibility, balance
sheet viability or management quality. Also, independent of the application
of the industry valuation process, the Fund continuously sells and redeems
its own shares, and, as a result, securities may have to be sold at times
from the Fund's portfolio to meet redemptions and monies received upon sale
of the Fund's shares must be used to purchase portfolio securities. Such
sales and purchases of portfolio securities will result in a portfolio that
does not completely reflect equal weighting of investment in industries or
companies.
Asset Allocation. Common stocks, particularly those sought for possible
capital appreciation, have historically experienced a great amount of price
fluctuation. The Investment Manager believes it is desirable to attempt to
reduce the risks of extreme price fluctuations even if such an attempt
results, as it likely will at times, in reducing the probabilities of
obtaining greater capital appreciation. Accordingly, the Investment Manager's
investment process incorporates elements which may reduce, although certainly
not eliminate, the volatility of a portfolio. The Fund may hold a portion of
its portfolio in fixed-income securities in an effort to moderate extremes of
price fluctuation. The determination of the appropriate asset allocation as
between equity and fixed-income investments will be made by the Investment
Manager in its discretion, based upon its evaluation of economic and market
conditions.
SECURITY LOANS
Consistent with applicable regulatory requirements, the Fund may lend its
portfolio securities to brokers, dealers and other financial institutions,
provided that such loans are callable at any time by the Fund, 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 such loans is that the Fund continues to receive
the income on the loaned securities while at the same time earning interest
on the cash amounts deposited as collateral, which will be invested in
short-term obligations.
A loan may be terminated by the borrower on one business day's notice, or
by the Fund on four business days' notice. If the borrower fails to deliver
the loaned securities within four days after receipt of notice, the Fund
could use the collateral to replace the securities while holding the borrower
liable for any excess of replacement cost over collateral. As with any
extensions of credit, there are risks of delay in recovery and, in some
cases, even loss of rights in the collateral should the borrower of the
securities fail financially. However, these loans of portfolio securities
will only be made to firms deemed by the Fund's management to be creditworthy
and when the income which can be earned from such loans justifies the
attendant risks. Upon termination of the loan, the borrower is required to
return the securities to the Fund. Any gain or loss in the market price
during the loan period would inure to the Fund.
When voting or consent rights which accompany loaned securities pass to
the borrower, the Fund will follow the policy of calling the loaned
securities, to be delivered within one day after notice, to permit the
exercise of such rights if the matters involved would have a material effect
on the Fund's investment in such loaned securities. The Fund will pay
reasonable finder's, administrative and custodial fees in connection with a
loan of its securities. During the year ended December 31, 1997, the Fund did
not loan any of its portfolio securities.
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OPTIONS AND FUTURES TRANSACTIONS
The Fund may write covered call options against securities held in its
portfolio and covered put options on eligible portfolio securities and stock
indexes and purchase options of the same series to effect closing
transactions, and may hedge against potential changes in the market value of
investments (or anticipated investments) by purchasing put and call options
on portfolio (or eligible portfolio) securities and engaging in transactions
involving futures contracts and options on such contracts. Call and put
options on U.S. Treasury notes, bonds and bills and equity securities are
listed on Exchanges and are written in over-the-counter transactions ("OTC
options"). Listed options are issued by the Options Clearing Corporation
("OCC"). Ownership of a listed call option gives the Fund the right to buy
from the OCC the underlying security covered by the option at the stated
exercise price (the price per unit of the underlying security) by filing an
exercise notice prior to the expiration date of the option. The writer
(seller) of the option would then have the obligation to sell to the OCC the
underlying security at that exercise price prior to the expiration date of
the option, regardless of its then current market price. Ownership of a
listed put option would give the Fund the right to sell the underlying
security to the OCC at the stated exercise price. Upon notice of exercise of
the put option, the writer of the put would have the obligation to purchase
the underlying security from the OCC at the exercise price.
Options on Treasury Bonds and Notes. Because trading in options written on
Treasury bonds and notes tends to center on the most recently auctioned
issues, the exchanges on which such securities trade will not continue
indefinitely to introduce options with new expirations to replace expiring
options on particular issues. Instead, the expirations introduced at the
commencement of options trading on a particular issue will be allowed to run
their course, with the possible addition of a limited number of new
expirations as the original ones expire. Options trading on each issue of
bonds or notes will thus be phased out as new options are listed on more
recent issues, and options representing a full range of expirations will not
ordinarily be available for every issue on which options are traded.
Options on Treasury Bills. Because a deliverable Treasury bill changes
from week to week, writers of Treasury bill calls cannot provide in advance
for their potential exercise settlement obligations by acquiring and holding
the underlying security. However, if the Fund holds a long position in
Treasury bills with a principal amount of the securities deliverable upon
exercise of the option, the position may be hedged from a risk standpoint by
the writing of a call option. For so long as the call option is outstanding,
the Fund will hold the Treasury bills in a segregated account with its
Custodian, so that they will be treated as being covered.
OTC Options. Exchange-listed options are issued by the OCC which assures
that all transactions in such options are properly executed. OTC options are
purchased from or sold (written) to dealers or financial institutions which
have entered into direct agreements with the 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. If the transacting dealer fails to make or take
delivery of the securities underlying an option it has written, in accordance
with the terms of that option, the Fund would lose the premium paid for the
option as well as any anticipated benefit of the transaction. The Fund will
engage in OTC option transactions only with primary U.S. Government
securities dealers recognized by the Federal Reserve Bank of New York.
Covered Call Writing. The Fund is permitted to write covered call options
on portfolio securities in order to aid in achieving its investment
objective. Generally, a call option is "covered" if the Fund owns, or has the
right to acquire, without additional cash consideration (or for additional
cash consideration held for the Fund by its Custodian in a segregated
account) the underlying security subject to the option except that in the
case of call options on U.S. Treasury Bills, the Fund might own U.S. Treasury
Bills of a different series from those underlying the call option, but with a
principal amount and value corresponding to the exercise price and a maturity
date not later than that of the securities deliverable under the call option.
A call option is also covered if the Fund holds a call on the same security
as the underlying security of the written option, where the exercise price of
the call used for coverage is equal to or less than the exercise price of the
call written or greater than the exercise price of the call written if the
mark to market difference is maintained by the Fund in cash, U.S. Government
securities or other liquid portfolio securities which the Fund holds in a
segregated account maintained with its Custodian.
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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 achieve a greater total return than
would be realized from holding the underlying securities alone. Moreover, the
premium received will offset a portion of the potential loss incurred by the
Fund if the securities underlying the option are ultimately sold by the Fund
at a loss. The premium received will fluctuate with varying economic market
conditions. If the market value of the portfolio securities upon which call
options have been written increases, the Fund may receive less total return
from the portion of its portfolio upon which calls have been written than it
would have had such call not been written.
During the option period, the Fund may be required, at any time, to
deliver the underlying security against payment of the exercise price on any
calls it has written (exercise of certain listed options may be limited to
specific expiration dates). This obligation is terminated upon the expiration
of the option period or at such earlier time when the writer effects a
closing purchase transaction. A closing purchase transaction is accomplished
by purchasing an option of the same series as the option previously written.
However, once the Fund has been assigned an exercise notice, the Fund will be
unable to effect a closing purchase transaction.
Closing purchase transactions are ordinarily effected to realize a profit
on an outstanding call option to prevent an underlying security from being
called, to permit the sale of an underlying security or to enable the Fund to
write another call option on the underlying security with either a different
exercise price or expiration date or both. Also, effecting a closing purchase
transaction will permit the cash or proceeds from the concurrent sale of any
securities subject to the option to be used for other investments by the
Fund. The Fund may realize a net gain or loss from a closing purchase
transaction depending upon whether the amount of the premium received on the
call option is more or less than the cost of effecting the closing purchase
transaction. Any loss incurred in a closing purchase transaction may be
wholly or partially offset by unrealized appreciation in the market value of
the underlying security. Conversely, a gain resulting from a closing purchase
transaction could be offset in whole or in part or exceeded by a decline in
the market value of the underlying security.
If a call option expires unexercised, the Fund realizes a gain in the
amount of the premium on the option less the commission paid. Such a gain,
however, may be offset by depreciation in the market value of the underlying
security during the option period. If a call option is exercised, the Fund
realizes a gain or loss from the sale of the underlying security equal to the
difference between the purchase price of the underlying security and the
proceeds of the sale of the security plus the premium received on the option
less the commission paid.
Options written by the Fund normally have expiration dates of from up to
nine months (equity securities) to eighteen months (fixed-income securities)
from the date written. The exercise price of a call option may be below,
equal to or above the current market value of the underlying security at the
time the option is written. See "Risks of Options Transactions," below.
Covered Put Writing. As a writer of a covered put option, the Fund incurs
an obligation to buy the security underlying the option from the purchaser of
the put, at the option's exercise price at any time during the option period,
at the purchaser's election (certain listed put options written by the Fund
will be exercisable by the purchaser only on a specific date). A put is
"covered" if, at all times, the Fund maintains, at all times, in a segregated
account maintained on its behalf at the Fund's Custodian, cash, U.S.
Government securities or other liquid portfolio securities in an amount equal
to at least the exercise price of the option, at all times, during the option
period. Similary, a short put position could be covered by the Fund by its
purchase of a put option on the same security as the underlying security of
the written option, where the exercise price of the purchased option is equal
to or more than the exercise price of the put written or less than the
exercise price of the put written if the mark to market difference is
maintained by the Fund in cash, U.S. Government securities or other liquid
portfolio securities which the Fund holds in a segregated account maintained
at its Custodian. In writing puts, the Fund assumes the risk of loss should
the market value of the underlying security decline below the exercise price
of the option (any loss being decreased by the receipt of the premium on the
option written). During the option period, the Fund may be required, at any
time, to make payment of the exercise price against delivery of the
underlying security. The operation of and limitations on covered put options
in other respects are substantially identical to those of call options.
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The Fund will write put options for two purposes: (1) to receive the
income derived from the premiums paid by purchasers; and (2) when the
Investment Manager wishes to purchase the security underlying the option at a
price lower than its current market price, in which case it will write the
covered put at an exercise price reflecting the lower purchase price sought.
The potential gain on a covered put option is limited to the premium received
on the option (less the commissions paid on the transaction) while the
potential loss equals the difference between the exercise price of the option
and the current market price of the underlying securities when the put is
exercised, offset by the premium received (less the commissions paid on the
transaction).
Purchasing Call and Put Options. As stated in the Prospectus, the Fund may
purchase listed and OTC call and put options on securities and stock indexes
in amounts equalling up to 10% of its total assets, with a maximum of 5% of
the Fund's assets invested in stock index options. The Fund may purchase call
options only in order to close out a covered call position (see "Covered Call
Writing" above). The purchase of a call option to effect a closing
transaction on a call written over-the-counter may be a listed or OTC option.
In either case, the call purchased is likely to be on the same securities and
have the same terms as the written option. If purchased over-the-counter, the
option would generally be acquired from the dealer or financial institution
which purchased the call written by the Fund.
The Fund may purchase put options on securities which it holds (or has the
right to acquire) in its portfolio only to protect itself against a decline
in the value of the security. If the value of the underlying security were to
fall below the exercise price of the put purchased in an amount greater than
the premium paid for the option, the Fund would incur no additional loss. The
Fund may also purchase put options to close out written put positions in a
manner similar to call options closing purchase transactions. In addition,
the Fund may sell a put option which it has previously purchased prior to the
sale of the securities underlying such option. Such a sale would result in a
net gain or loss depending on whether the amount received on the sale is more
or less than the premium and other transaction costs paid on the put option
which is sold. And such gain or loss could be offset in whole or in part by a
change in the market value of the underlying security. If a put option
purchased by the Fund expired without being sold or exercised, the premium
would be lost.
Risks of Options Transactions. During the option period, the covered call
writer has, in return for the premium on the option, given up the opportunity
for capital appreciation above the exercise price should the market price of
the underlying security increase, but has retained the risk of loss should
the price of the underlying security decline. The secured 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. 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.
Prior to exercise or expiration, an option position can only be terminated
by entering into a closing purchase or sale transaction. If a covered call
option writer is unable to effect a closing purchase transaction, it cannot
sell the underlying security until the option expires or the option is
exercised. Accordingly, a covered call option writer may not be able to sell
an underlying security at a time when it might otherwise be advantageous to
do so. A secured put option writer who is unable to effect a closing purchase
transaction would continue to bear the risk of decline in the market price of
the underlying security until the option expires or is exercised. In
addition, a secured put writer would be unable to utilize the amount held in
cash or U.S. government or other liquid portfolio securities as security for
the put option for other investment purposes until the exercise or expiration
of the option.
The 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. However, the Fund may be able to purchase an
offsetting option which does not close out its position as a writer but
constitutes an asset of equal value to the obligation under the option
written. If the Fund is not able to either enter into a closing purchase
transaction or
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purchase an offsetting position, it will be required to maintain the
securities subject to the call, or the collateral underlying the put, even
though it might not be advantageous to do so, until a closing transaction can
be entered into (or the option is exercised or expires).
Among the possible reasons for the absence of a liquid secondary market on
an Exchange are: (i) insufficient trading interest in certain options; (ii)
restrictions on transactions imposed by an Exchange; (iii) trading halts,
suspensions or other restrictions imposed with respect to particular classes
or series of options or underlying securities; (iv) interruption of the
normal operations on an Exchange; (v) inadequacy of the facilities of an
Exchange or the OCC to handle current trading volume; or (vi) a decision by
one or more Exchanges to discontinue the trading of options (or a particular
class or series of options), in which event the secondary market on that
Exchange (or in that class or series of options) would cease to exist,
although outstanding options on that Exchange that had been issued by the OCC
as a result of trades on that Exchange would generally continue to be
excerisable in accordance with their terms.
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. Similarly, in
the event of the bankruptcy of the writer of an OTC option purchased by the
Fund, the Fund could experience a loss of all or part of the value of the
option. Transactions are entered into by the Fund only with brokers or
financial institutions deemed creditworthy by the Investment Manager.
Each of the Exchanges has established limitations governing the maximum
number of call or put options on the same underlying security or futures
contract (whether or not covered) which may be written by a single investor,
whether acting alone or in concert with others (regardless of whether such
options are written on the same or different Exchanges or are held or written
on one or more accounts or through one or more brokers). An Exchange may
order the liquidation of positions found to be in violation of these limits
and it may impose other sanctions or restrictions. These position limits may
restrict the number of listed options which 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.
Stock Index Options. Options on stock indexes are similar to options on
stock except that, rather than the right to take or make delivery of stock at
a specified price, an option on a stock index gives the holder the right to
receive, upon exercise of the option, an amount of cash if the closing level
of the stock index upon which the option is based is greater than, in the
case of a call, or less than, in the case of a put, the exercise price of the
option. This amount of cash is equal to such difference between the closing
price of the index and the exercise price of the option expressed in dollars
times a specified multiple (the "multiplier"). The multiplier for an index
option performs a function similar to the unit of trading for a stock option.
It determines the total dollar value per contract of each point in the
difference between the exercise price of an option and the current level of
the underlying index. A multiplier of 100 means that a one-point difference
will yield $100. Options on different indexes may have different multipliers.
The writer of the option is obligated, in return for the premium received, to
make delivery of this amount. Unlike stock options, all settlements are in
cash and a gain or loss depends on price movements in the stock market
generally (or in a particular segment of the market) rather than the price
movements in individual stocks. Currently, options are traded on the S&P 100
Index and the S&P 500 Index on the Chicago Board Options Exchange, the Major
Market Index and the Computer Technology Index, Oil Index and Institutional
Index on the American Stock Exchange and the NYSE Index and NYSE Beta Index
on the New York Stock Exchange, The Financial News Composite Index on the
Pacific Stock Exchange and the Value Line Index, National O-T-C Index and
Utilities Index on the Philadelphia Stock Exchange, each of which and any
similar index on which options are traded in the future which include stocks
that are not limited to any particular industry or segment of the market is
referred to as a "broadly based stock market index." The Fund will invest
only in broadly based indexes. Options on broad-based
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stock indexes provide the Fund with a means of protecting the Fund against
the risk of market wide price movements. If the Investment Manager
anticipates a market decline, the Fund could purchase a stock index put
option. If the expected market decline materialized, the resulting decrease
in the value of the Fund's portfolio would be offset to the extent of the
increase in the value of the put option. If the Investment Manager
anticipates a market rise, the Fund may purchase a stock index call option to
enable the Fund to participate in such rise until completion of anticipated
common stock purchases by the Fund. Purchases and sales of stock index
options also enable the Investment Manager to more speedily achieve changes
in the Fund's equity positions.
The Fund will write put options on stock indexes only if such positions
are covered by cash, U.S. government securities or other liquid portfolio
securities equal to the aggregate exercise price of the puts, or by a put
option on the same stock index with a strike price no lower than the strike
price of the put option sold by the Fund, which cover is held for the Fund in
a segregated account maintained for it by the Fund's Custodian. All call
options on stock indexes written by the Fund will be covered either by a
portfolio of stocks substantially replicating the movement of the index
underlying the call option or by holding a separate call option on the same
stock index with a strike price no higher than the strike price of the call
option sold by the Fund.
Risks of Options on Indexes. Because exercises of stock index options are
settled in cash, call writers such as the Fund cannot provide in advance for
their potential settlement obligations by acquiring and holding the
underlying securities. A call writer can offset some of the risk of its
writing position by holding a diversified portfolio of stocks similar to
those on which the underlying index is based. However, most investors cannot,
as a practical matter, acquire and hold a portfolio containing exactly the
same stocks as the underlying index, and, as a result, bear a risk that the
value of the securities held will vary from the value of the index. Even if
an index call writer could assemble a stock portfolio that exactly reproduced
the composition of the underlying index, the writer still would not be fully
covered from a risk standpoint because of the "timing risk" inherent in
writing index options. When an index option is exercised, the amount of cash
that the holder is entitled to receive is determined by the difference
between the exercise price and the closing index level on the date when the
option is exercised. As with other kinds of options, the writer will not
learn that it had been assigned until the next business day, at the earliest.
The time lag between exercise and notice of assignment poses no risk for the
writer of a covered call on a specific underlying security, such as a common
stock, because there the writer's obligation is to deliver the underlying
security, not to pay its value as of a fixed time in the past. So long as the
writer already owns the underlying security, it can satisfy its settlement
obligations by simply delivering it, and the risk that its value may have
declined since the exercise date is borne by the exercising holder. In
contrast, even if the writer of an index call holds stocks that exactly match
the composition of the underlying index, it will not be able to satisfy its
assignment obligations by delivering those stocks against payment of the
exercise price. Instead, it will be required to pay cash in an amount based
on the closing index value on the exercise date; and by the time it learns
that it has been assigned, the index may have declined, with a corresponding
decrease in the value of its stock portfolio. This "timing risk" is an
inherent limitation on the ability of index call writers to cover their risk
exposure by holding stock positions.
A holder of an index option who exercises it before the closing index
value for that day is available runs the risk that the level of the
underlying index may subsequently change. If such a change causes the
exercised option to fall out-of-the-money, the exercising holder will be
required to pay the difference between the closing index value and the
exercise price of the option (times the applicable multiplier) to the
assigned writer.
If dissemination of the current level of an underlying index is
interrupted, or if trading is interrupted in stocks accounting for a
substantial portion of the value of an index, the trading of options on that
index will ordinarily be halted. If the trading of options on an underlying
index is halted, an exchange may impose restrictions prohibiting the exercise
of such options.
Futures Contracts. As stated in the Prospectus, the Fund may purchase and
sell interest rate and stock index futures contracts ("futures contracts")
that are traded on U.S. commodity exchanges on such
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underlying securities as U.S. Treasury bonds, notes, bills and GNMA
Certificates ("interest rate" futures) and such indexes as the S&P 500 Index,
the Moody's Investment-Grade Corporate Bond Index and the New York Stock
Exchange Composite Index ("index" futures).
As a futures contract purchaser, the Fund incurs an obligation to take
delivery of a specified amount of the obligation underlying the contract at a
specified time in the future for a specified price. As a seller of a futures
contract, the Fund incurs an obligation to deliver the specified amount of
the underlying obligation at a specified time in return for an agreed upon
price.
The Fund will purchase or sell interest rate futures contracts and bond
index futures contracts for the purpose of hedging its fixed-income portfolio
(or anticipated portfolio) securities against changes in prevailing interest
rates. If the Investment Manager anticipates that interest rates may rise
and, concomitantly, the price of fixed-income securities falls, the Fund may
sell an interest rate futures contract or a bond index futures contract. If
declining interest rates are anticipated, the Fund may purchase an interest
rate futures contract to protect against a potential increase in the price of
U.S. Government securities the Fund intends to purchase. Subsequently,
appropriate fixed-income securities may be purchased by the Fund in an
orderly fashion; as securities are purchased, corresponding futures positions
would be terminated by offsetting sales of contracts.
The Fund will purchase or sell stock index futures contracts for the
purpose of hedging its equity portfolio (or anticipated portfolio) securities
against changes in their prices. If the Investment Manager anticipates that
the prices of stock held by the Fund may fall, the Fund may sell a stock
index futures contract. Conversely, if the Investment Manager wishes to hedge
against anticipated price rises in those stocks which the Fund intends to
purchase, the Fund may purchase stock index futures contracts. In addition,
interest rate and stock index futures contracts will be bought or sold in
order to close out a short or long position in a corresponding futures
contract.
Although most interest rate futures contracts call for actual delivery or
acceptance of securities, the contracts usually are closed out before the
settlement date without the making or taking of delivery. Stock index futures
contracts provide for the delivery of an amount of cash equal to a specified
dollar amount times the difference between the stock index value at the open
or close of the last trading day of the contract and the futures contract
price. A futures contract sale is closed out by effecting a futures contract
purchase for the same aggregate amount of the specific type of equity
security and the same delivery date. If the sales 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 and the same
delivery date. If the offsetting sale price exceeds the purchase price, the
purchaser would realize a gain, whereas if the purchase price exceeds the
offsetting sale price, the purchaser would realize a loss. There is no
assurance that the Fund will be able to enter into a closing transaction.
Interest Rate Futures Contracts. When the Fund enters into an interest
rate futures contract, it is initially required to deposit with the Fund's
Custodian, in a segregated account in the name of the broker performing the
transaction, an "initial margin" of cash or U.S. Government securities or
other liquid portfolio securities equal to approximately 2% of the contract
amount. Initial margin requirements are established by the Exchanges on which
futures contracts trade and may, from time to time, change. In addition,
brokers may establish margin deposit requirements in excess of those required
by the Exchanges.
Initial margin in futures transactions is different from margin in
securities transactions in that initial margin does not involve the borrowing
of funds by a 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 subsequent
deposits of cash or U.S. Government securities called "variation margin,"
with the Fund's futures contract clearing broker, which are reflective of
price fluctuations in the futures contract. Currently, interest rate futures
contracts can be purchased on debt securities such as U.S. Treasury Bills and
Bonds, U.S. Treasury Notes with Maturities between 6 1/2 and 10 years, GNMA
Certificates and Bank Certificates of Deposit.
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Index Futures Contracts. As discussed in the Prospectus, the Fund may
invest in index futures contracts. An index futures contract sale creates an
obligation by the Fund, as seller, to deliver cash at a specified future
time. An index futures contract purchase would create an obligation by the
Fund, as purchaser, to take delivery of cash at a specified future time.
Futures contracts on indexes do not require the physical delivery of
securities, but provide for a final cash settlement on the expiration date
which reflects accumulated profits and losses credited or debited to each
party's account.
The Fund is required to maintain margin deposits with brokerage firms
through which it effects index futures contracts in a manner similar to that
described above for interest rate futures contracts. Currently, the initial
margin requirements range from 3% to 10% of the contract amount for index
futures. In addition, due to current industry practice, daily variations in
gains and losses on open contracts are required to be reflected in cash in
the form of variation margin payments. The Fund may be required to make
additional margin payments during the term of the contract.
At any time prior to expiration of the futures contract, the Fund may
elect to close the position by taking an opposite position which will operate
to terminate the Fund's position in the futures contract. A final
determination of variation margin is then made, additional cash is required
to be paid by or released to the Fund and the Fund realizes a loss or a gain.
Currently, index futures contracts can be purchased or sold with respect
to, among others, the Standard & Poor's 500 Stock Price Index and the
Standard & Poor's 100 Stock Price Index on the Chicago Mercantile Exchange,
the New York Stock Exchange Composite Index on the New York Futures Exchange,
the Major Market Index on the American Stock Exchange, the Value Line Stock
Index on the Kansas City Board of Trade and the Moody's Investment-Grade
Corporate Bond Index on the Chicago Board of Trade.
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 Fund will purchase and write options on futures contracts for
identical purposes to those set forth above for the purchase of a futures
contract (purchase of a call option or sale of a put option) and the sale of
a futures contract (purchase of a put option or sale of a call option), or to
close out a long or short position in futures contracts. If, for example, the
Investment Manager wished to protect against an increase in interest rates
and the resulting negative impact on the value of a portion of its
fixed-income portfolio, it might write a call option on an interest rate
futures contract, the underlying security of which correlates with the
portion of the portfolio the Investment Manager seeks to hedge. Any premiums
received in the writing of options on futures contracts may, of course,
augment the total return of the Fund and thereby provide a further hedge
against losses resulting from price declines in portions of the Fund's
portfolio.
The writer of an option on a futures contract is required to deposit
initial and variation margin pursuant to requirements similar to those
applicable to futures contracts. Premiums received from the writing of an
option on a futures contract are included in initial margin deposits.
Limitations on Futures Contracts and Options on Futures. 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
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<PAGE>
exercise price of the call (put) option is less (more) than the market price
of the underlying security) at the time of purchase, the in-the-money amount
may be excluded in calculating the 5%. However, there is no overall
limitation on the percentage of the Fund's assets which may be subject to a
hedge position. In addition, in accordance with the regulations of the
Commodity Futures Trading Commission ("CFTC") under which the Fund is
exempted from registration as a commodity pool operator, the Fund may only
enter into futures contracts and options on futures contracts transactions
for purposes of hedging a part or all of its portfolio. If the CFTC changes
its regulations so that the Fund would be permitted to write options on
futures contracts for purposes other than hedging the Fund's investments
without CFTC registration, the Fund may engage in such transactions for those
purposes. Except as described above, there are no other limitations on the
use of futures and options thereon by the Fund.
Risks of Transactions in Futures Contracts and Related Options. The Fund
may sell a futures contract to protect against the decline in the value of
securities held by the Fund. However, it is possible that the futures market
may advance and the value of securities held in the portfolio of the Fund may
decline. If this occurred, the Fund would lose money on the futures contract
and also experience a decline in value of its portfolio securities. However,
while this could occur for a very brief period or to a very small degree,
over time the value of a diversified portfolio will tend to move in the same
direction as the futures contracts.
If the Fund purchases a futures contract to hedge against the increase in
value of securities it intends to buy, and the value of such securities
decreases, then the Investment Manager may determine not to invest in the
securities as planned and will realize a loss on the futures contract that is
not offset by a reduction in the price of the securities.
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 at its Custodian, cash, U.S. Government
securities or other liquid portfolio securities equal in value (when added to
any initial or variation margin on deposit) to the market value of the
securities underlying the futures contract or the exercise price of the
option. Such a position may also be covered by owning the securities
underlying the futures contract (in the case of a stock index futures
contract a portfolio of securities substantially replicating the relevant
index), or by holding a call option permitting the Fund to purchase the same
contract at a price no higher than the price at which the short position was
established.
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 for the Fund by its Custodian. Alternatively, the Fund could cover
its long position by purchasing a put option on the same futures contract
with an exercise price as high or higher than the price of the contract held
by the Fund.
Exchanges limit the amount by which the price of a futures contract may
move on any day. If the price moves equal the daily limit on successive days,
then it may prove impossible to liquidate a futures position until the daily
limit moves have ceased. In the event of adverse price movements, the Fund
would continue to be required to make daily cash payments of variation margin
on open futures positions. In such situations, if the Fund has insufficient
cash, it may have to sell portfolio securities to meet daily variation margin
requirements at a time when it may be disadvantageous to do so. In addition,
the Fund may be required to take or make delivery of the instruments
underlying interest rate futures contracts it holds at a time when it is
disadvantageous to do so. The inability to close out options and futures
positions could also have an adverse impact on the Fund's ability to
effectively hedge its portfolio.
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. Transactions are entered into by the Fund only with brokers or
financial institutions deemed creditworthy by the Investment Manager.
There may exist an imperfect correlation between the price movements of
futures contracts purchased by the Fund and the movements in the prices of
the securities which are the subject of the
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<PAGE>
hedge. If participants in the futures market elect to close out their
contracts through offsetting transactions rather than meet margin deposit
requirements, distortions in the normal relationship between the securities
and futures markets could result. Price distortions could also result if
investors in futures contracts opt to make or take delivery of underlying
securities rather than engage in closing transactions due to the resultant
reduction in the liquidity of the futures market. In addition, due to the
fact that, from the point of view of speculators, the deposit requirements in
the futures markets are less onerous than margin requirements in the cash
market, increased participation by speculators in the futures market could
cause temporary price distortions. Due to the possibility of price
distortions in the futures market and because of the imperfect correlation
between movements in the prices of securities and movements in the prices of
futures contracts, a correct forecast of stock price or interest rate trends
by the Investment Manager may still not result in a successful hedging
transaction.
There is no assurance that a liquid secondary market will exist for
futures contracts and related options in which 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. In
addition, limitations imposed by an exchange or board of trade on which
futures contracts are traded may compel or prevent the Fund from closing out
a contract which may result in reduced gain or increased loss to the Fund.
The absence of a liquid market in futures contracts might cause the Fund to
make or take delivery of the underlying securities at a time when it may be
disadvantageous to do so.
Compared to the purchase or sale of futures contracts, the purchase of
call or put options on futures contracts involves less potential risk to the
Fund because the maximum amount at risk is the premium paid for the options
(plus transaction costs). However, there may be circumstances when the
purchase of a call or put option on a futures contract would result in a loss
to the Fund notwithstanding that the purchase or sale of a futures contract
would not result in a loss, as in the instance where there is no movement in
the prices of the futures contract or underlying securities.
FOREIGN SECURITIES
As stated in the Prospectus, the Fund may invest in securities issued by
foreign issuers. Investors should carefully consider the risks of investing
in securities of foreign issuers and securities denominated in non-U.S.
currencies. Fluctuations in the relative rates of exchange between the
currencies of different nations will affect the value of the Fund's
investments. Changes in foreign currency exchange rates relative to the U.S.
dollar will affect the U.S. dollar value of the Fund's assets denominated in
that currency and thereby impact upon the Fund's total return on such assets.
Foreign currency exchange rates are determined by forces of supply and
demand on the foreign exchange markets. These forces are themselves affected
by the international balance of payments and other economic and financial
conditions, government intervention, speculation and other factors. Moreover,
foreign currency exchange rates may be affected by the regulatory control of
the exchanges on which the currencies trade.
Investments in foreign securities will also occasion risks relating to
political and economic developments abroad, including the possibility of
expropriations or confiscatory taxation, limitations on the use or transfer
of Fund assets and any effects of foreign social, economic or political
instability. Foreign companies are not subject to the regulatory requirements
of U.S. companies and, as such, there may be less publicly available
information about such companies. Moreover, foreign companies are not subject
to uniform accounting, auditing and financial reporting standards and
requirements comparable to those applicable to U.S. companies.
Securities of foreign issuers may be less liquid than comparable
securities of U.S. issuers and, as such, their price changes may be more
volatile. Furthermore, foreign exchanges and broker-dealers are generally
subject to less government and exchange scrutiny and regulation than their
American counterparts. Brokerage commissions, dealer concessions and other
transaction costs may be higher on foreign markets than in the U.S. In
addition, differences in clearance and settlement procedures on
23
<PAGE>
foreign markets may occasion delays in settlements of Fund trades effected in
such markets. Inability to dispose of portfolio securities due to settlement
delays could result in losses to the Fund due to subsequent declines in value
of such securities and the inability of the Fund to make intended security
purchases due to settlement problems could result in a failure of the Fund to
make potentially advantageous investments.
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 ("collateral")
at a specified price and at a fixed time in the future, usually not more than
seven days from the date of purchase. The collateral will be maintained in a
segregated account and will be marked-to-market daily to determine that the
value of the collateral, as specified in the agreement, does not decrease
below the purchase price plus accrued interest. If such decrease occurs,
additional collateral will be requested and, when received, added to the
account to maintain full collateralization. The Fund will accrue interest
from the institution until the time when the repurchase is to occur. Although
such date is deemed by the Fund to be the maturity date of a repurchase
agreement, the maturities of securities subject to repurchase agreements are
not subject to any limits.
While repurchase agreements involve certain risks not associated with
direct investments in debt securities, the Fund follows procedures designed
to minimize such risks. These procedures include effecting repurchase
transactions only with large, well-capitalized and well-established financial
institutions whose financial condition will be continually monitored by the
Investment Manager subject to procedures established by the Board of Trustees
of the Fund. In addition, as described above, the value of the collateral
underlying the repurchase agreement will be at least equal to the repurchase
price, including any accrued interest earned on the repurchase agreement. In
the event of a default or bankruptcy by a selling financial institution, the
Fund will seek to liquidate such collateral. However, the exercising of the
Fund's right to liquidate such collateral could involve certain costs or
delays and, to the extent that proceeds from any sale upon a default of the
obligation to repurchase were less than the repurchase price, the Fund could
suffer a loss. It is the current policy of the 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.
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 such transactions are negotiated, the price is fixed
at the time of the commitment, but delivery and payment can take place a
month or more after the date of commitment. While 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. The Fund will also establish a
segregated account with its custodian bank in which it will continually
maintain cash or cash equivalents or other liquid portfolio securities equal
in value to commitments to purchase securities on a when-issued, delayed
delivery or forward commitment basis. During the fiscal year ended December
31, 1997, the Fund did not purchase securities on a when-issued, delayed
delivery or forward commitment basis.
24
<PAGE>
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 the purchase of any such security will
not be recognized in the portfolio of the Fund until the Investment Manager
determines that issuance of the security is probable. At such time, the Fund
will record the transaction and, in determining its net asset value, will
reflect the value of the security daily. At such time, the Fund will also
establish a segregated account with its custodian bank in which it will
maintain cash or cash equivalents or other liquid portfolio securities equal
in value to recognized commitments for such securities. The value of the
Fund's commitments to purchase the securities of any one issuer, together
with the value of all securities of such issuer owned by the Fund, may not
exceed 5% of the value of the Fund's total assets at the time the initial
commitment to purchase such securities is made (see "Investment
Restrictions"). An increase in the percentage of the Fund's assets committed
to the purchase of securities on a "when, as and if issued" basis may
increase the volatility of its net asset value. The Investment Manager and
the Trustees do not believe that the net asset value of the Fund will be
adversely affected by its purchase of securities on such basis. During the
fiscal year ended December 31, 1997, the Fund did not purchase securities on
a "when, as and if issued" basis. 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 5% of its total assets in securities which are
subject to restrictions on resale because they have not been registered under
the Securities Act of 1933, as amended (the "Securities Act"), or which are
otherwise not readily marketable. (Securities eligible for resale pursuant to
Rule 144A of the Securities Act, and determined to be liquid pursuant to the
procedures discussed in the following paragraph, are not subject to the
foregoing restriction.) These securities are generally referred to as private
placements or restricted securities. Limitations on the resale of such
securities may have an adverse effect on their marketability, and may prevent
the Fund from disposing of them promptly at reasonable prices. The Fund may
have to bear the expense of registering such securities for resale and the
risk of substantial delays in effecting such registration.
Rule 144A under the Securities Act permits the Fund to sell restricted
securities to qualified institutional buyers without limitation. The
Investment Manager, pursuant to procedures adopted by the Trustees of the
Fund, 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," such security will not be included within the category "illiquid
securities," which under current policy may not exceed 15% of the Fund's net
assets.
INVESTMENT RESTRICTIONS
- -----------------------------------------------------------------------------
In addition to the investment restrictions enumerated in the Prospectus,
the investment restrictions listed below have been adopted by the Fund as
fundamental policies, except as otherwise indicated. Under the Act, a
fundamental policy may not be changed without the vote of a majority of the
outstanding voting securities of the Fund, as defined in the Act. Such a
majority is defined as the lesser of (a) 67% or more of the shares present at
a meeting of Shareholders, if the holders of 50% of the outstanding shares of
the 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.
The Fund may not:
1. Invest in securities of any issuer if, to the knowledge of the Fund,
any officer or trustee/director of the Fund or of the Investment Manager
owns more than 1/2 of 1% of the
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<PAGE>
outstanding securities of such issuer, and such officers and
trustees/directors who own more than 1/2 of 1% own in the aggregate more
than 5% of the outstanding securities of such issuer.
2. Purchase or sell real estate or interests therein (including limited
partnership interests), although the Fund may purchase securities of
issuers which engage in real estate operations and securities secured by
real estate or interests therein.
3. Purchase or sell commodities except that the Fund may purchase or
sell (write) futures contracts and related options.
4. 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.
5. Purchase securities of other investment companies, except in
connection with a merger, consolidation, reorganization or acquisition of
assets.
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 borrowings effected within the limitations set forth in restriction
(6). For the purpose of this restriction, collateral arrangements with
respect to the writing of options 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 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 in accordance
with restrictions described above; or (c) lending portfolio securities.
9. Make loans of money or securities, except: (a) by the purchase of
debt obligations in which the Fund may invest consistent with its
investment objective and policies; (b) by investment in repurchase
agreements; or (c) by lending its portfolio securities.
10. Make short sales of securities.
11. 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 or related options thereon is not considered the
purchase of a security on margin.
12. Engage in the underwriting of securities, except insofar as the Fund
may be deemed an underwriter under the Securities Act of 1933 in disposing
of a portfolio security.
13. Invest for the purpose of exercising control or management of any
other issuer.
Notwithstanding any other investment policy or restriction, 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.
PORTFOLIO TRANSACTIONS AND BROKERAGE
- -----------------------------------------------------------------------------
Subject to the general supervision of the Board of Trustees, the
Investment Manager is responsible for decisions to buy and sell securities
for the 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
26
<PAGE>
underwriter's concession or discount. Options and futures transactions will
usually be effected through a broker and a commission will be charged. 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 fiscal years ended December 31, 1995, 1996 and 1997 the Fund paid a
total of $6,911,661, $11,278,417 and $15,385,470, respectively in brokerage
commissions.
The Investment Manager currently serves as investment manager to a number
of clients, including other investment companies, and may in the future act
as investment manager or adviser to others. It is the practice of the
Investment Manager to cause purchase and sale transactions to be allocated
among the 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. In the case of certain initial and secondary public offerings, the
Investment Manager utilizes a pro rata allocation process based on the size
of the Dean Witter Funds involved and the number of shares available from the
public offering.
The policy of the 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 from obtaining a high quality of brokerage and research services. In
seeking to determine the reasonableness of brokerage commissions paid in any
transaction, the Investment Manager relies upon its experience and knowledge
regarding commissions generally charged by various brokers and on its
judgment in evaluating the brokerage and research services received from the
broker effecting the transaction. Such determinations are necessarily
subjective and imprecise, as in most cases an exact dollar value for those
services is not ascertainable.
In seeking to implement the Fund's policies, the Investment Manager
effects transactions with those brokers and dealers who the Investment
Manager believes provide the most favorable prices and are capable of
providing efficient executions. If the Investment Manager believes such
prices and executions are obtainable from more than one broker or dealer, it
may give consideration to placing portfolio transactions with those brokers
and dealers who also furnish research and other services to the Fund or the
Investment Manager. Such services may include, but are not limited to, any
one or more of the following: information as to the availability of
securities for purchase or sale; statistical or factual information or
opinions pertaining to investment; wire services; and appraisals or
evaluations of portfolio securities. During the fiscal year ended December
31, 1997, the Fund paid $13,487,395 in brokerage commissions in connection
with transactions in the aggregate amount of $10,756,352,989 to brokers
because of research services provided.
The information and services received by the Investment Manager from
brokers and dealers may be of benefit to the Investment Manager in the
management of accounts of some of its other clients and may not in all cases
benefit the Fund directly. While the receipt of such information and services
is useful in varying degrees and would generally reduce the amount of
research or services otherwise performed by the Investment Manager and
thereby reduce its expenses, it is of indeterminable value and the management
fee paid to the Investment Manager is not reduced by any amount that may be
attributable to the value of such services.
Pursuant to an order of the Securities and Exchange Commission, the Fund
may effect principal transactions in certain money market instruments with
DWR. The Fund will limit its transactions with DWR to U.S. Government and
Government Agency Securities, Bank Money Instruments (i.e., Certifi-
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<PAGE>
cates of Deposit and Bankers' Acceptances) and Commercial Paper. Such
transactions will be effected with DWR only when the price available from DWR
is better than that available from other dealers. During the fiscal years
ended December 31, 1995, 1996 and 1997, the Fund did not effect any principal
transactions with DWR.
Consistent with the policy described above, brokerage transactions in
securities listed on exchanges or admitted to unlisted trading privileges may
be effected through DWR, Morgan Stanley & Co. Incorporated ("MS & Co.") and
other affiliated brokers and dealers. In order for an affiliated broker or
dealer to effect any portfolio transactions for the Fund, the commissions,
fees or other remuneration received by the affiliated broker or dealer must
be reasonable and fair compared to the commissions, fees or other
remuneration paid to other brokers in connection with comparable transactions
involving similar securities being purchased or sold on an exchange during a
comparable period of time. This standard would allow the affiliated broker or
dealer to receive no more than the remuneration which would be expected to be
received by an unaffiliated broker in a commensurate arm's-length
transaction. Furthermore, the Board of Trustees of the Fund, including a
majority of the Trustees who are not "interested" persons of the Fund, as
defined in the Act, have adopted procedures which are reasonably designed to
provide that 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 fiscal years ended December 31, 1995, 1996 and 1997, the
Fund paid a total of $989,462, $902,407 and $1,122,089, respectively, in
brokerage commissions to DWR. During the fiscal year ended December 31, 1997,
the brokerage commissions paid to DWR represented approximately 7.29% of the
total brokerage commissions paid by the Fund during the year and were paid on
account of transactions having an aggregate dollar value equal to
approximately 8.89% of the aggregate dollar value of all portfolio
transactions of the Fund during the year for which commissions were paid.
During the period June 1 through December 31, 1997, the Fund paid a total of
$551,901 in brokerage commissions to MS & Co., which broker-dealer became an
affiliate of the Investment Manager on May 31, 1997 upon consummation of the
merger of Dean Witter, Discover & Co. with Morgan Stanley Group Inc. The
brokerage commissions paid to MS & Co. represented approximately 3.59% of the
total brokerage commissions paid by the Fund for this period and were paid on
account of transactions having an aggregate dollar value equal to
approximately 5.02% of the aggregate dollar value of all portfolio
transactions of the Fund during the period for which commissions were paid.
During the fiscal year ended December 31, 1997, the Fund purchased common
stock issued by Merrill Lynch, Pierce, Fenner & Smith Inc. and Lehman
Brothers Inc. which issuers were among the ten brokers or the ten dealers
which executed transactions for or with the Fund in the largest dollar
amounts during the year. At December 31, 1997, the Fund held common stock
issued by Merrill Lynch, Pierce, Fenner & Smith Inc. and Lehman Brothers Inc.
with market values of $47,409,375 and $20,400,000, respectively.
THE DISTRIBUTOR
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As discussed in the Prospectus, shares of the Fund are distributed by Dean
Witter Distributors Inc. (the "Distributor"). The Distributor has entered
into a selected dealer agreement with DWR, which through its own sales
organization sells shares of the Fund. In addition, the Distributor may enter
into similar agreements with other selected broker-dealers. The Distributor,
a Delaware corporation, is a wholly-owned subsidiary of MSDW. The Board of
Trustees of the Fund including a majority of the Trustees who are not, and
were not at the time they voted, interested persons of the Fund, as defined
in the Act ( the "Independent Trustees"), approved, at their meeting held on
June 30, 1997, the current Distribution Agreement appointing the Distributor
as exclusive distributor of the Fund's shares and providing for the
Distributor to bear distribution expenses not borne by the Fund. By its
terms, the Distribution Agreement has an initial term ending April 30, 1998
and will remain in effect from year to year thereafter if approved by the
Board.
The Distributor bears all expenses it may incur in providing services
under the Distribution Agreement. Such expenses include the payment of
commissions for sales of the Fund's shares and
28
<PAGE>
incentive compensation to account executives. 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 of 1933, as amended. Under the
Distribution Agreement, the Distributor uses its best efforts in rendering
services to the Fund, but in the absence of willful misfeasance, bad faith,
gross negligence or reckless disregard of its obligations, the Distributor is
not liable to the Fund or any of its shareholders for any error of judgment
or mistake of law or for any act or omission or for any losses sustained by
the Fund or its shareholders.
PLAN OF DISTRIBUTION
The Fund has adopted a Plan of Distribution pursuant to Rule 12b-1 under
the Act (the "Plan") pursuant to which each Class, other than Class D, pays
the Distributor compensation accrued daily and payable monthly at the
following annual rates: 0.25% and 1.0% of the average daily net assets of
Class A and Class C, respectively, and, with respect to Class B, 1.0% of the
lesser of: (a) the average daily aggregate gross sales of the Fund's Class B
shares since the inception of the plan of distribution adopted by the Fund
(the "Prior Plan") on April 30, 1984 (not including reinvestments of
dividends or capital gains distributions), less the average daily aggregate
net asset value of the Fund's Class B shares redeemed since the Prior Plan's
inception upon which a contingent deferred sales charge has been imposed or
upon which such charge has been waived, or (b) the average daily net assets
of Class B shares attributable to shares issued, net of shares redeemed,
since the inception of the Prior Plan. The Distributor also receives the
proceeds of front-end sales charges and of contingent deferred sales charges
imposed on certain redemptions of shares, which are separate and apart from
payments made pursuant to the Plan (see "Purchase of Fund Shares" in the
Prospectus). The Distributor has informed the Fund that it and/or DWR
received (a) approximately $3,588,974, $3,792,237 and $4,721,534 in
contingent deferred sales charges from Class B for the fiscal years ended
December 31, 1995, 1996 and 1997, respectively; (b) approximately $0 and
$3,192 in contingent deferred sales charges from Class A and Class C,
respectively, for the fiscal year ended December 31, 1997; and (c)
approximately $202,038 in front-end sales charges from Class A for the fiscal
year ended December 31, 1997, none of which was retained by the Distributor.
The Distributor has informed the Fund that the entire fee payable by Class
A and a portion of the fees payable by each of Class B and Class C each year
pursuant to the Plan equal to 0.25% of such Class's average daily net assets
are currently each characterized as a "service fee" under the Rules of the
Association of the National Association of Securities Dealers, Inc. (of which
the Distributor is a member). The "service fee" is a payment made for
personal service and/or the maintenance of shareholder accounts. The
remaining portion of the Plan fees payable by a Class, if any, is
characterized as an "asset-based sales charge" as such is defined by the
aforementioned Rules of the Association.
The Plan is substantially identical to the Prior Plan and was adopted by
the Fund solely in connection with its reorganization as a Massachusetts
business trust in April, 1987. The Plan was adopted by a majority vote of the
Board of Trustees, including all of the Trustees of the Fund who are not
"interested persons" of the Fund (as defined in the Act) and who have no
direct or indirect financial interest in the operation of the Plan (the
"Independent 12b-1 Trustees"), cast in person at a meeting called for the
purpose of voting on the Plan, on April 15, 1987 and by the shareholders
holding a majority, as defined in the Act, of the outstanding voting
securities of the Fund at an Annual Meeting of Shareholders of the Fund held
on April 21, 1987.
At their meeting held on October 30, 1992, the Trustees of the Fund,
including all of the Independent 12b-1 Trustees, approved certain amendments
to the Plan which took effect in January, 1993 and were designed to reflect
the fact that upon an internal reorganization the share distribution
activities
29
<PAGE>
theretofore performed for the Fund by DWR were assumed by the Distributor and
DWR's sales activities are now being performed pursuant to the terms of a
selected dealer agreement between the Distributor and DWR. The amendments
provide that payments under the Plan will be made to the Distributor rather
than to DWR as before the amendment, and that the Distributor in turn is
authorized to make payments to DWR, its affiliates or other selected
broker-dealers (or direct that the Fund pay such entities directly). The
Distributor is also authorized to retain part of such fee as compensation for
its own distribution-related expenses. At their meeting held on April 28,
1993, the Trustees, including a majority of the Independent 12b-1 Trustees,
approved certain technical amendments to the Plan in connection with
amendments adopted by the National Association of Securities Dealers, Inc. to
its Rules of the Association. At their meeting held on October 26, 1995, the
Trustees of the Fund, including all of the Independent 12b-1 Trustees,
approved an amendment to the Plan to permit payments to be made under the
Plan with respect to certain distribution expenses incurred in connection
with the distribution of shares, including personal services to shareholders
with respect to holdings of such shares, of an investment company whose
assets are acquired by the Fund in a tax-free reorganization. At their
meeting held on June 30, 1997, the Trustees, including a majority of the
Independent 12b-1 Trustees, approved amendments to the Plan to reflect the
multiple-class structure for the Fund, which took effect on July 28, 1997.
Under the Plan and as required by Rule 12b-1, the Trustees receive and
review promptly after the end of each calendar quarter a written report
provided by the Distributor of the amounts expended under the Plan and the
purpose for which such expenditures were made. Class B shares of the Fund
accrued amounts payable to the Distributor under the Plan, during the fiscal
year ended December 31, 1997, of $30,004,099. This amount is equal to 0.83%
of the average daily net assets of Class B for the fiscal year and was
calculated pursuant to clause (a) of the compensation formula under the Plan.
For the fiscal period July 28 through December 31, 1997, Class A and Class C
shares of the Fund accrued payments under the Plan amounting to $7,380 and
$26,712, respectively, which amounts are equal to 0.25% and 1.00% of the
average daily net assets of Class A and Class C, respectively, for such
period.
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 of shares, each with a different distribution arrangement as set
forth in the Prospectus.
With respect to Class A shares, DWR compensates its account executives by
paying them, from proceeds of the front-end sales charge, commissions for the
sale of Class A shares, currently a gross sales credit of up to 5.0% of the
amount sold (except as provided in the following sentence) and an annual
residual commission, currently a residual of up to 0.25% of the current value
of the respective accounts for which they are the account executives or
dealers of record in all cases. On orders of $1 million or more (for which no
sales charge was paid) or net asset value purchases by employer-sponsored
401(k) and other plans qualified under Section 401(a) of the Internal Revenue
Code ("Qualified Retirement Plans") for which Morgan Stanley Dean Witter
Trust FSB ("MSDW Trust") serves as Trustee or DWR's Retirement Plan Services
serves as recordkeeper pursuant to a written Recordkeeping Services
Agreement, the Investment Manager compensates DWR's account executives by
paying them, from its own funds, a gross sales credit of 1.0% of the amount
sold.
With respect to Class B shares, DWR compensates its account executives by
paying them, from its own funds, commissions for the sale of Class B shares,
currently a gross sales credit of up to 5.0% of the amount sold (except as
provided in the following sentence) and an annual residual commission,
currently a residual of up to 0.25% of the current value (not including
reinvested dividends or distributions) of the amount sold in all cases. In
the case of Class B shares purchased on or after July 28, 1997 by Qualified
Retirement Plans for which MSDW Trust serves as Trustee or DWR's Retirement
Plan Services serves as recordkeeper pursuant to a written Recordkeeping
Services Agreement, DWR compensates its account executives by paying them,
from its own funds, a gross sales credit of 3.0% of the amount sold.
With respect to Class C shares, DWR compensates its account executives by
paying them, from its own funds, commissions for the sale of Class C shares,
currently a gross sales credit of up to 1.0% of the amount sold and an annual
residual commission, currently a residual of up to 1.0% of the current value
of the respective accounts for which they are the account executives of
record.
30
<PAGE>
With respect to Class D shares other than shares held by participants in
the InterCapital mutual fund asset allocation program, the Investment Manager
compensates DWR's account executives by paying them, from its own funds,
commissions for the sale of Class D shares, currently a gross sales credit of
up to 1.0% of the amount sold. There is a chargeback of 100% of the amount
paid if the Class D shares are redeemed in the first year and a chargeback of
50% of the amount paid if the Class D shares are redeemed in the second year
after purchase. The Investment Manager also compensates DWR's account
executives by paying them, from its own funds, an annual residual commission,
currently a residual of up to 0.10% of the current value of the respective
accounts for which they are the account executives of record (not including
accounts of participants in the InterCapital mutual fund asset allocation
program).
The gross sales credit is a charge which reflects commissions paid by DWR
to its account executives and DWR's Fund-associated distribution-related
expenses, including sales compensation, and overhead and other branch office
distribution-related expenses including (a) the expenses of operating DWR's
branch offices in connection with the sale of Fund shares, including lease
costs, the salaries and employee benefits of operations and sales support
personnel, utility costs, communications costs and the costs of stationery
and supplies, (b) the costs of client sales seminars, (c) travel expenses of
mutual fund sales coordinators to promote the sale of Fund shares and (d)
other expenses relating to branch promotion of Fund sales. The distribution
fee that the Distributor receives from the Fund under the Plan, in effect,
offsets distribution expenses incurred under the Plan on behalf of the Fund
and, in the case of Class B shares, opportunity costs, such as the gross
sales credit and an assumed interest charge thereon ("carrying charge"). In
the Distributor's reporting of the distribution expenses to the Fund, in the
case of Class B shares, such assumed interest (computed at the "broker's call
rate") has been calculated on the gross credit as it is reduced by amounts
received by the Distributor under the Plan and any contingent deferred sales
charges received by the Distributor upon redemption of shares of the Fund. No
other interest charge is included as a distribution expense in the
Distributor's calculation of its distribution costs for this purpose. The
broker's call rate is the interest rate charged to securities brokers on
loans secured by exchange-listed securities.
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 other than expenses representing the service fee,
and, with respect to Class C, in the case of all expenses other than expenses
representing a gross sales credit or a residual to account executives, such
amounts shall be determined at the beginning of each calendar quarter by the
Trustees, including, a majority of the Independent 12b-1 Trustees. Expenses
representing the service fee (for Class A) or a gross sales credit or a
residual to account executives (for Class C) may be reimbursed without prior
determination. In the event that the Distributor proposes that monies shall
be reimbursed for other than such expenses, then in making quarterly
determinations of the amounts that may be reimbursed by the Fund, the
Distributor will provide and the Trustees will review a quarterly budget of
projected distribution expenses to be incurred on behalf of 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 December 31, 1997 to the Distributor.
The Distributor and DWR estimate that they have spent, pursuant to the Plan,
$190,354,031 on behalf of Class B since the inception of the Prior Plan. It
is estimated that this amount was spent in approximately the following ways:
(i) 3.83% ($7,290,650)--advertising and promotional expenses; (ii) 0.34%
($654,259)--printing of prospectuses for distribution to
31
<PAGE>
other than current shareholders; and (iii) 95.83% ($182,409,122)--other
expenses, including the gross sales credit and the carrying charge, of which
7.09% ($12,930,176) represents carrying charges, 37.39% ($68,198,328)
represents commission credits to DWR branch offices for payments of
commissions to account executives and 55.52% ($101,280,618) represents
overhead and other branch office distribution-related expenses. The amounts
accrued by Class A and Class C for distribution during the fiscal period July
28 through December 31, 1997 were for expenses which relate to compensation
of sales personnel and associated overhead expenses.
In the case of Class B shares, at any given time, the expenses of
distributing shares of the Fund may be more or less than the total of (i) the
payments made by the Fund pursuant to the Plan and (ii) the proceeds of
contingent deferred sales charges paid by investors upon redemption of
shares. The Distributor has advised the Fund that in the case of Class B
shares the excess distribution expenses, including the carrying charge
designed to approximate the opportunity costs incurred by DWR which arise
from it having advanced monies without having received the amount of any
sales charges imposed at the time of sale of the Fund's Class B shares,
totalled $72,540,376 as of December 31, 1997. Because there is no requirement
under the Plan that the Distributor be reimbursed for all distribution
expenses with respect to Class B shares or any requirement that the Plan be
continued from year to year, this excess amount does not constitute a
liability of the Fund. Although there is no legal obligation for the Fund to
pay expenses incurred in excess of payments made to the Distributor under the
Plan and the proceeds of contingent deferred sales charges paid by investors
upon redemption of shares, if for any reason the Plan is terminated, the
Trustees will consider at that time the manner in which to treat such
expenses. Any cumulative expenses incurred, but not yet recovered through
distribution fees or contingent deferred sales charges, may or may not be
recovered through future distribution fees or contingent deferred sales
charges.
No interested person of the Fund nor any Trustee of the Fund who is not an
interested person of the Fund, as defined in the Act, has any direct
financial interest in the operation of the Plan except to the extent that the
Distributor, InterCapital, DWR, DWSC or certain of their employees may be
deemed to have such an interest as a result of benefits derived from the
successful operation of the Plan or as a result of receiving a portion of the
amounts expended thereunder by the Fund.
Under its terms, the Plan had an initial term ending December 31, 1996 and
will continue from year to year thereafter, provided such continuance is
approved annually by a vote of the Trustees in the manner described above.
Prior to the Board's approval of amendments to the Plan to reflect the
multiple-class structure for the Fund, the most recent continuance of the
Plan for one year, until April 30, 1998, was approved by the Board of
Trustees of the Fund, including a majority of the Independent 12b-1 Trustees,
at a Board meeting held on April 24, 1997. Prior to approving the
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; and (3) what services had been provided
and were continuing to be provided under the Plan to the Fund and its
shareholders. Based upon their review, the Trustees of the Fund, including
each of the Independent 12b-1 Trustees, determined that continuation of the
Plan would be in the best interest of the Fund and would have a reasonable
likelihood of continuing to benefit the Fund and its shareholders. In the
Trustees' quarterly review of the Plan, they will consider its continued
appropriateness and the level of compensation provided therein.
The Plan may not be amended to increase materially the amount to be spent
for the services described therein without approval by the shareholders of
the affected Class or Classes of the Fund, and all material amendments to the
Plan must also be approved by the Trustees in the manner described above. The
Plan may be terminated at any time, without payment of any penalty, by vote
of a majority of the Independent 12b-1 Trustees or by a vote of a majority of
the outstanding voting securities of the Fund (as defined in the Act) on not
more than thirty days' written notice to any other party to the Plan. So long
as the Plan is in effect, the election and nomination of Independent 12b-1
Trustees shall be committed to the discretion of the Independent 12b-1
Trustees.
32
<PAGE>
DETERMINATION OF NET ASSET VALUE
- -----------------------------------------------------------------------------
The net asset value per share for each Class of shares of the Fund is
determined once daily as of 4:00 p.m. New York time (or, on days when the New
York Stock Exchange closes prior to 4:00 p.m., at such earlier time) on each
day that the New York Stock Exchange is open. The New York Stock Exchange
currently observes the following holidays: New Year's Day, Reverend Dr.
Martin Luther King, Jr. Day, Presidents Day, Good Friday, Memorial Day,
Independence Day, Labor Day, Thanksgiving Day, and Christmas Day.
As stated in the Prospectus, short-term securities with remaining
maturities of sixty days or less at the time of purchase are valued at
amortized cost, unless the Trustees determine such does not reflect the
securities' market value, in which case these securities will be valued at
their fair value as determined by the Trustees. Other short-term debt
securities will be valued on a mark-to-market basis until such time as they
reach a remaining maturity of sixty days, whereupon they will be valued at
amortized cost using their value on the 61st day unless the Trustees
determine such does not reflect the securities' market value, in which case
these securities will be valued at their fair value as determined by the
Trustees. 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 and all options on equity securities are valued at the mean
between their latest bid and asked prices. Futures are valued at the latest
sale price on the commodities exchange on which they trade unless the
Trustees determine such price does not reflect their market value, in which
case they will be valued at their fair value as determined by the Trustees.
All other securities and other assets are valued at their fair value as
determined in good faith under procedures established by and under the
supervision of the Trustees.
Generally, trading in foreign securities, as well as corporate bonds,
United States 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.
PURCHASE OF FUND SHARES
- -----------------------------------------------------------------------------
As discussed in the Prospectus, the Fund offers four Classes of shares as
follows:
INITIAL SALES CHARGE ALTERNATIVE--CLASS A SHARES
Class A shares are sold to investors with an initial sales charge that
declines to zero for larger purchases; however, Class A shares sold without
an initial sales charge are subject to a contingent deferred sales charge
("CDSC") of 1.0% if redeemed within one year of purchase, except in the
circumstances discussed in the Prospectus.
Right of Accumulation. As discussed in the Prospectus, investors may
combine the current value of shares purchased in separate transactions for
purposes of benefitting from the reduced sales charges available for
purchases of shares of the Fund totalling at least $25,000 in net asset
value. For example, if any person or entity who qualifies for this privilege
holds Class A shares of the Fund and/or other Dean Witter Funds that are
multiple class funds ("Dean Witter Multi-Class Funds") or shares of other
Dean Witter Funds sold with a front-end sales charge purchased at a price
including a front-end sales charge having a current value of $5,000, and
purchases $20,000 of additional shares of the Fund, the sales charge
applicable to the $20,000 purchase would be 4.75% of the offering price.
The Distributor must be notified by the selected broker-dealer or the
shareholder at the time a purchase order is placed that the purchase
qualifies for the reduced charge under the Right of
33
<PAGE>
Accumulation. Similar notification must be made in writing by the selected
broker-dealer or shareholder when such an order is placed by mail. The
reduced sales charge will not be granted if: (a) such notification is not
furnished at the time of the order; or (b) a review of the records of the
Distributor or Morgan Stanley Dean Witter Trust FSB (the "Transfer Agent")
fails to confirm the investor's represented holdings.
Letter of Intent. As discussed in the Prospectus, reduced sales charges
are available to investors who enter into a written Letter of Intent
providing for the purchase, within a thirteen-month period, of Class A shares
of the Fund from the Distributor or from a single Selected Broker-Dealer.
A Letter of Intent permits an investor to establish a total investment
goal to be achieved by any number of purchases over a thirteen-month period.
Each purchase of Class A shares made during the period will receive the
reduced sales commission applicable to the amount represented by the goal, as
if it were a single purchase. A number of shares equal in value to 5% of the
dollar amount of the Letter of Intent will be held in escrow by the Transfer
Agent, in the name of the shareholder. The initial purchase under a Letter of
Intent must be equal to at least 5% of the stated investment goal.
The Letter of Intent does not obligate the investor to purchase, nor the
Fund to sell, the indicated amount. In the event the Letter of Intent goal is
not achieved within the thirteen-month period, the investor is required to
pay the difference between the sales charge otherwise applicable to the
purchases made during this period and sales charges actually paid. Such
payment may be made directly to the Distributor or, if not paid, the
Distributor is authorized by the shareholder to liquidate a sufficient number
of his or her escrowed shares to obtain such difference.
If the goal is exceeded and purchases pass the next sales charge level,
the sales charge on the entire amount of the purchase that results in passing
that level and on subsequent purchases will be subject to further reduced
sales charges in the same manner as set forth above under "Right of
Accumulation," but there will be no retroactive reduction of sales charges on
previous purchases. For the purpose of determining whether the investor is
entitled to a further reduced sales charge applicable to purchases at or
above a sales charge level which exceeds the stated goal of a Letter of
Intent, the cumulative current net asset value of any shares owned by the
investor in any other Dean Witter Funds held by the shareholder which were
previously purchased at a price including a front-end sales charge (including
shares of the Fund and other Dean Witter Funds acquired in exchange for those
shares, and including in each case shares acquired through reinvestment of
dividends and distributions) will be added to the cost or net asset value of
shares of the Fund owned by the investor. However, shares of "Exchange Funds"
(see "Shareholder Services--Exchange Privilege") and the purchase of shares
of other Dean Witter Funds will not be included in determining whether the
stated goal of a Letter of Intent has been reached.
At any time while a Letter of Intent is in effect, a shareholder may, by
written notice to the Distributor, increase the amount of the stated goal. In
that event, only shares purchased during the previous 90-day period and still
owned by the shareholder will be included in the new sales charge reduction.
The 5% escrow and minimum purchase requirements will be applicable to the new
stated goal. Investors electing to purchase shares of the Fund pursuant to a
Letter of Intent should carefully read such Letter of Intent.
CONTINGENT DEFERRED SALES CHARGE ALTERNATIVE--CLASS B SHARES
Class B shares are sold without an initial sales charge but are subject to
a CDSC payable upon most redemptions within six years after purchase. As
stated in the Prospectus, a CDSC will be imposed on any redemption by an
investor if after such redemption the current value of the investor's Class B
shares of the Fund is less than the dollar amount of all payments by the
shareholder for the purchase of Class B shares during the preceding six years
(or, in the case of shares held by certain Qualified Retirement Plans, three
years). However, no CDSC will be imposed to the extent that the net asset
value of the shares redeemed does not exceed: (a) the current net asset value
of shares purchased more than six years (or, in the case of shares held by
certain Qualified Retirement Plans, three years) prior to the redemption,
plus (b) the current net asset value of shares purchased through reinvestment
of dividends or distributions of the Fund or another Dean Witter Fund (see
"Shareholder Services--Targeted
34
<PAGE>
Dividends"), plus (c) the current net asset value of shares acquired in
exchange for (i) shares of Dean Witter front-end sales charge funds, or (ii)
shares of other Dean Witter Funds for which shares of front-end sales charge
funds have been exchanged (see "Shareholder Services--Exchange Privilege"),
plus (d) increases in the net asset value of the investor's shares above the
total amount of payments for the purchase of Fund shares made during the
preceding six (three) years. The CDSC will be paid to the Distributor.
In determining the applicability of the CDSC to each redemption, the
amount which represents an increase in the net asset value of the investor's
shares above the amount of the total payments for the purchase of shares
within the last six years (or, in the case of shares held by certain
Qualified Retirement Plans, three years) will be redeemed first. In the event
the redemption amount exceeds such increase in value, the next portion of the
amount redeemed will be the amount which represents the net asset value of
the investor's shares purchased more than six (three) years prior to the
redemption and/or shares purchased through reinvestment of dividends or
distributions and/or shares acquired in exchange for shares of Dean Witter
front-end sales charge funds, or for shares of other Dean Witter funds for
which shares of front-end sales charge funds have been exchanged. A portion
of the amount redeemed which exceeds an amount which represents both such
increase in value and the value of shares purchased more than six years (or,
in the case of shares held by certain Qualified Retirement Plans, three
years) prior to the redemption and/or shares purchased through reinvestment
of dividends or distributions and/or shares acquired in the above-described
exchanges will be subject to a CDSC.
The amount of the CDSC, if any, will vary depending on the number of years
from the time of payment for the purchase of Class B shares of the Fund until
the time of redemption of such shares. For purposes of determining the number
of years from the time of any payment for the purchase of shares, all
payments made during a month will be aggregated and deemed to have been made
on the last day of the month. The following table sets forth the rates of the
CDSC applicable to most Class B shares of the Fund:
<TABLE>
<CAPTION>
YEAR SINCE
PURCHASE CDSC AS A PERCENTAGE
PAYMENT MADE OF AMOUNT REDEEMED
- --------------------------- ------------------------
<S> <C>
First ...................... 5.0%
Second ..................... 4.0%
Third ...................... 3.0%
Fourth ..................... 2.0%
Fifth ...................... 2.0%
Sixth ...................... 1.0%
Seventh and thereafter .... None
</TABLE>
The following table sets forth the rates of the CDSC applicable to Class B
shares of the Fund purchased on or after July 28, 1997 by Qualified
Retirement Plans for which MSDW Trust serves as Trustee or DWR's Retirement
Plan Services serves as recordkeeper pursuant to a written Recordkeeping
Services Agreement:
<TABLE>
<CAPTION>
YEAR SINCE
PURCHASE CDSC AS A PERCENTAGE
PAYMENT MADE OF AMOUNT REDEEMED
- ------------------------- ------------------------
<S> <C>
First .................... 2.0%
Second ................... 2.0%
Third .................... 1.0%
Fourth and thereafter .... None
</TABLE>
In determining the rate of the CDSC, it will be assumed that a redemption
is made of shares held by the investor for the longest period of time within
the applicable six-year or three-year period. This will result in any such
CDSC being imposed at the lowest possible rate. The CDSC will be imposed, in
accordance with the table shown above, on any redemptions within six years
(or, in the case of shares held by certain Qualified Retirement Plans, three
years) of purchase which are in excess of these amounts and which redemptions
do not qualify for waiver of the CDSC, as described in the Prospectus.
35
<PAGE>
LEVEL LOAD ALTERNATIVE--CLASS C SHARES
Class C shares are sold without a sales charge but are subject to a CDSC
of 1.0% on most redemptions made within one year after purchase, except in
the circumstances discussed in the Prospectus.
NO LOAD ALTERNATIVE--CLASS D SHARES
Class D shares are offered without any sales charge on purchase or
redemption. Class D shares are offered only to those persons meeting the
qualifications set forth in the Prospectus.
SHAREHOLDER SERVICES
- -----------------------------------------------------------------------------
Upon the purchase of shares of the Fund, a Shareholder Investment Account
is opened for the investor on the books of the Fund and maintained by the
Transfer Agent. This is an open account in which shares owned by the investor
are credited by the Transfer Agent in lieu of issuance of a share
certificate. If a share certificate is desired, it must be requested in
writing for each transaction. Certificates are issued only for full shares
and may be redeposited in the account at any time. There is no charge to the
investor for issuance of a certificate. Whenever a shareholder-instituted
transaction takes place in the Shareholder Investment Account, the
shareholder will be mailed a confirmation of the transaction from the Fund or
from DWR or other selected broker-dealer.
Automatic Investment of Dividends and Distributions. As stated in the
Prospectus, all income dividends and capital gains distributions are
automatically paid in full and fractional shares of the applicable Class of
the Fund, unless the shareholder requests that they be paid in cash. Each
purchase of shares of the Fund is made upon the condition that the Transfer
Agent is thereby automatically appointed as agent of the investor to receive
all dividends and capital gains distributions on shares owned by the
investor. Such dividends and distributions will be paid, at the net asset
value per share, in shares of the applicable Class of the Fund (or in cash if
the shareholder so requests) as of the close of business on the record date.
At any time an investor may request the Transfer Agent, in writing, to have
subsequent dividends and/or capital gains distributions paid to him or her in
cash rather than shares. To assure sufficient time to process the change,
such request should be received by the Transfer Agent at least five business
days prior to the record date of the dividend or distribution. In the case of
recently purchased shares for which registration instructions have not been
received on the record date, cash payments will be made to DWR or other
selected broker-dealer, and will be forwarded to the shareholder, upon the
receipt of proper instructions. It has been and remains the Fund's policy and
practice that, if checks for dividends or distributions paid in cash remain
uncashed, no interest will accrue on amounts represented by such uncashed
checks.
Targeted Dividends. (Service Mark) In states where it is legally
permissible, shareholders may also have all income dividends and capital
gains distributions automatically invested in shares of any Class of an
open-end Dean Witter Fund other than Dean Witter American Value Fund or in
another Class of Dean Witter American Value Fund. Such investment will be
made as described above for automatic investment in shares of the applicable
Class of the Fund, at the net asset value per share of the selected Dean
Witter Fund as of the close of business on the payment date of the dividend
or distribution and will begin to earn dividends, if any, in the selected
Dean Witter Fund the next business day. To participate in the Targeted
Dividends program, shareholders should contact their DWR or other selected
broker-dealer account executive or the Transfer Agent. Shareholders of the
Fund must be shareholders of the selected Class of the Dean Witter Fund
targeted to receive investments from dividends at the time they enter the
Targeted Dividends program. Investors should review the prospectus of the
targeted Dean Witter Fund before entering the program.
EasyInvest. (Service Mark) Shareholders may subscribe to EasyInvest, an
automatic purchase plan which provides for any amount from $100 to $5,000 to
be transferred automatically from a checking or savings account or following
redemption of shares of a Dean Witter money market fund, on a semi-monthly,
monthly or quarterly basis, to the Transfer Agent for investment in shares of
the Fund. Shares purchased through EasyInvest will be added to the
shareholder's existing account at the net asset value calculated
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the same business day the transfer of funds is effected (subject to any
applicable sales charges). Shares of the Dean Witter money market funds
redeemed in connection with EasyInvest are redeemed on the business day
preceding the transfer of funds. For further information or to subscribe to
EasyInvest, shareholders should contact their DWR or other selected
broker-dealer account executive or the Transfer Agent.
Investment of Dividends or Distributions Received in Cash. As discussed in
the Prospectus, any shareholder who receives a cash payment representing a
dividend or distribution may invest such dividend or distribution in shares
of the applicable Class at net asset value, without the imposition of a CDSC
upon redemption, by returning the check or the proceeds to the Transfer Agent
within 30 days after the payment date. If the shareholder returns the
proceeds of a dividend or distribution, such funds must be accompanied by a
signed statement indicating that the proceeds constitute a dividend or
distribution to be invested. Such investment will be made at the net asset
value per share next determined after receipt of the check or proceeds by the
Transfer Agent.
Systematic Withdrawal Plan. As discussed in the Prospectus, a systematic
withdrawal plan (the "Withdrawal Plan") is available for shareholders who own
or purchase shares of the Fund having a minimum value of $10,000 based upon
the then current net asset value. The Withdrawal Plan provides for monthly or
quarterly (March, June, September and December) checks in any dollar amount,
not less than $25, or in any whole percentage of the account balance, on an
annualized basis. Any applicable CDSC will be imposed on shares redeemed
under the Withdrawal Plan (see "Purchase of Fund Shares"). Therefore, any
shareholder participating in the Withdrawal Plan will have sufficient shares
redeemed from his or her account so that the proceeds (net of any applicable
CDSC) to the shareholder will be the designated monthly or quarterly amount.
The Transfer Agent acts as agent for the shareholder in tendering to the
Fund for redemption sufficient full and fractional shares to provide the
amount of the periodic withdrawal payment designated in the application. The
shares will be redeemed at their net asset value determined, at the
shareholder's option, on the tenth or twenty-fifth day (or next following
business day) of the relevant month or quarter and normally a check for the
proceeds will be mailed by the Transfer Agent, or amounts credited to a
shareholder's DWR brokerage account, within five business days after the date
of redemption. The Withdrawal Plan may be terminated at any time by the Fund.
Withdrawal Plan payments should not be considered as dividends, yields or
income. If periodic withdrawal plan payments continuously exceed net
investment income and net capital gains, the share holder's original
investment will be correspondingly reduced and ultimately exhausted.
Each withdrawal constitutes a redemption of shares and any gain or loss
realized must be recognized for federal income tax purposes. Although the
shareholder may make additional investments of $2,500 or more under the
Withdrawal Plan, withdrawals made concurrently with purchases of additional
shares may be inadvisable because of the sales charges which may be
applicable to purchases or redemptions of shares (see "Purchase of Fund
Shares").
Any shareholder who wishes to have payments under the Withdrawal Plan made
to a third party or sent to an address other than the one listed on the
account must send complete written instructions to the Transfer Agent to
enroll in the Withdrawal Plan. The shareholder's signature on such
instructions must be guaranteed by an eligible guarantor acceptable to the
Transfer Agent (shareholders should contact the Transfer Agent for a
determination as to whether a particular institution is such an eligible
guarantor). A shareholder may, at any time, change the amount and interval of
withdrawal payments through his or her Account Executive or by written
notification to the Transfer Agent. In addition, the party and/or the address
to which checks are mailed may be changed by written notification to the
Transfer Agent, with signature guarantees required in the manner described
above. The shareholder may also terminate the Withdrawal Plan at any time by
written notice to the Transfer Agent. In the event of such termination, the
account will be continued as a regular shareholder investment account. The
shareholder may also redeem all or part of the shares held in the Withdrawal
Plan account (see "Redemptions and Repurchases" in the Prospectus) at any
time.
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Direct Investments through Transfer Agent. As discussed in the Prospectus,
shareholders may make additional investments in any Class of shares of the
Fund for which they qualify at any time by sending a check in any amount, not
less than $100, payable to Dean Witter American Value Fund, and indicating
the selected Class, directly to the Fund's Transfer Agent. In the case of
Class A shares, after deduction of any applicable sales charge, the balance
will be applied to the purchase of Fund shares, and, in the case of shares of
the other Classes, the entire amount will be applied to the purchase of Fund
shares, at the net asset value per share next computed after receipt of the
check or purchase payment by the Transfer Agent. The shares so purchased will
be credited to the investor's account.
EXCHANGE PRIVILEGE
As discussed in the Prospectus, the Fund makes available to its
shareholders an Exchange Privilege whereby shareholders of each Class of
shares of the Fund may exchange their shares for shares of the same Class of
shares of any other Dean Witter Multi-Class Fund without the imposition of
any exchange fee. Shares may also be exchanged for shares of any of the
following funds: Dean Witter Short-Term U.S. Treasury Trust, Dean Witter
Limited Term Municipal Trust, Dean Witter Short-Term Bond Fund, Dean Witter
Intermediate Term U.S. Treasury Trust and five Dean Witter Funds which are
money market funds (the foregoing nine funds are hereinafter referred to as
the "Exchange Funds"). Class A shares may also be exchanged for shares of
Dean Witter Multi-State Municipal Series Trust and Dean Witter Hawaii
Municipal Trust, which are Dean Witter Funds sold with a front-end sales
charge ("FSC Funds"). Class B shares may also be exchanged for shares of Dean
Witter Global Short-Term Income Fund Inc. ("Global Short-Term"), which is a
Dean Witter Fund offered with a CDSC. Exchanges may be made after the shares
of the Fund acquired by purchase (not by exchange or dividend reinvestment)
have been held for thirty days. There is no waiting period for exchanges of
shares acquired by exchange or dividend reinvestment. An exchange will be
treated for federal income tax purposes the same as a repurchase or
redemption of shares, on which the shareholder may realize a capital gain or
loss.
Any new account established through the Exchange Privilege will have the
same registration and cash dividend or dividend reinvestment plan as the
present account, unless the Transfer Agent receives written notification to
the contrary. For telephone exchanges, the exact registration of the existing
account and the account number must be provided.
Any shares held in certificate form cannot be exchanged but must be
forwarded to the Transfer Agent and deposited into the shareholder's account
before being eligible for exchange. (Certificates mailed in for deposit
should not be endorsed.)
As described below, and in the Prospectus under the caption "Purchase of
Fund Shares," a CDSC may be imposed upon a redemption, depending on a number
of factors, including the number of years from the time of purchase until the
time of redemption or exchange ("holding period"). When shares of a Dean
Witter Multi-Class Fund or Global Short-Term are exchanged for shares of an
Exchange Fund, the exchange is executed at no charge to the shareholder,
without the imposition of the CDSC at the time of the exchange. During the
period of time the shareholder remains in the Exchange Fund (calculated from
the last day of the month in which the Exchange Fund shares were acquired),
the holding period or "year since purchase payment made" is frozen. When
shares are redeemed out of the Exchange Fund, they will be subject to a CDSC
which would be based upon the period of time the shareholder held shares in a
Dean Witter Multi-Class Fund or in Global Short-Term. However, in the case of
shares exchanged into an Exchange Fund on or after April 23, 1990, upon a
redemption of shares which results in a CDSC being imposed, a credit (not to
exceed the amount of the CDSC) will be given in an amount equal to the
Exchange Fund 12b-1 distribution fees incurred on or after that date which
are attributable to those shares. Shareholders acquiring shares of an
Exchange Fund pursuant to this exchange privilege may exchange those shares
back into a Dean Witter Multi-Class Fund or Global Short-Term from the
Exchange Fund, with no CDSC being imposed on such exchange. The holding
period previously frozen when shares were first exchanged for shares of the
Exchange Fund resumes on the last day of the month in which shares of a Dean
Witter Multi-Class Fund or of Global Short-Term are reacquired. A CDSC is
imposed only upon an ultimate redemption, based upon the time (calculated as
described above) the shareholder was invested in a Dean Witter Multi-Class
Fund or in Global
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Short-Term. In the case of exchanges of Class A shares which are subject to a
CDSC, the holding period also includes the time (calculated as described
above) the shareholder was invested in a FSC Fund.
When shares initially purchased in a Dean Witter Multi-Class Fund or
Global Short-Term are exchanged for shares of a Dean Witter Multi-Class Fund,
shares of Global Short-Term, shares of a FSC Fund or shares of an Exchange
Fund, the date of purchase of the shares of the fund exchanged into, for
purposes of the CDSC upon redemption, will be the last day of the month in
which the shares being exchanged were originally purchased. In allocating the
purchase payments between funds for purposes of the CDSC, the amount which
represents the current net asset value of shares at the time of the exchange
which were (i) purchased more than one, three or six years (depending on the
CDSC schedule applicable to the shares) prior to the exchange, (ii)
originally acquired through reinvestment of dividends or distributions and
(iii) acquired in exchange for shares of FSC Funds, or for shares of other
Dean Witter Funds for which shares of FSC Funds have been exchanged (all such
shares called "Free Shares"), will be exchanged first. After an exchange, all
dividends earned on shares in an Exchange Fund will be considered Free
Shares. If the exchanged amount exceeds the value of such Free Shares, an
exchange is made, on a block-by-block basis, of non-Free Shares held for the
longest period of time (except that, with respect to Class B shares, if
shares held for identical periods of time but subject to different CDSC
schedules are held in the same Exchange Privilege account, the shares of that
block that are subject to a lower CDSC rate will be exchanged prior to the
shares of that block that are subject to a higher CDSC rate). Shares equal to
any appreciation in the value of non-Free Shares exchanged will be treated as
Free Shares, and the amount of the purchase payments for the non-Free Shares
of the fund exchanged into will be equal to the lesser of (a) the purchase
payments for, or (b) the current net asset value of, the exchanged non-Free
Shares. If an exchange between funds would result in exchange of only part of
a particular block of non-Free Shares, then shares equal to any appreciation
in the value of the block (up to the amount of the exchange) will be treated
as Free Shares and exchanged first, and the purchase payment for that block
will be allocated on a pro rata basis between the non-Free Shares of that
block to be retained and the non-Free Shares to be exchanged. The prorated
amount of such purchase payment attributable to the retained non-Free Shares
will remain as the purchase payment for such shares, and the amount of
purchase payment for the exchanged non-Free Shares will be equal to the
lesser of (a) the prorated amount of the purchase payment for, or (b) the
current net asset value of, those exchanged non-Free Shares. Based upon the
procedures described in the Prospectus under the caption "Purchase of Fund
Shares," any applicable CDSC will be imposed upon the ultimate redemption of
shares of any fund, regardless of the number of exchanges since those shares
were originally purchased.
With respect to the redemption or repurchase of shares of the Fund, the
application of proceeds to the purchase of new shares in the Fund or any
other of the funds and the general administration of the Exchange Privilege,
the Transfer Agent acts as agent for the Distributor and for the
shareholder's selected broker-dealer, if any, in the performance of such
functions. With respect to exchanges, redemptions or repurchases, the
Transfer Agent shall be liable for its own negligence and not for the default
or negligence of its correspondents or for losses in transit. The Fund shall
not be liable for any default or negligence of the Transfer Agent, the
Distributor or any selected broker-dealer.
The Distributor and any selected broker-dealer have authorized and
appointed the Transfer Agent to act as their agent in connection with the
application of proceeds of any redemption of Fund shares to the purchase of
shares of any other fund and the general administration of the Exchange
Privilege. No commission or discounts will be paid to the Distributor or any
selected broker-dealer for any transactions pursuant to this Exchange
Privilege.
Exchanges are subject to the minimum investment requirement and any other
conditions imposed by each fund. (The minimum initial investment for the
Exchange Privilege account of each Class is $5,000 for Dean Witter Liquid
Asset Fund Inc., Dean Witter Tax-Free Daily Income Trust, Dean Witter
California Tax-Free Daily Income Trust and Dean Witter New York Municipal
Money Market Trust, although those funds may, in their discretion, accept
initial investments of as low as $1,000. The
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minimum initial investment for the Exchange Privilege account of each Class
is $10,000 for Dean Witter Short-Term U.S. Treasury Trust, although that
fund, in its discretion, may accept initial purchases of as low as $5,000.
The minimum initial investment for the Exchange Privilege account of each
Class is $5,000 for Dean Witter Special Value Fund. The minimum initial
investment for the Exchange Privilege account of each Class of all other Dean
Witter Funds for which the Exchange Privilege is available is $1,000.) Upon
exchange into an Exchange Fund, the shares of that fund will be held in a
special Exchange Privilege Account separately from accounts of those
shareholders who have acquired their shares directly from that fund. As a
result, certain services normally available to shareholders of those funds,
including the check writing feature, will not be available for funds held in
that account.
The Fund and each of the other Dean Witter Funds may limit the number of
times this Exchange Privilege may be exercised by any investor within a
specified period of time. Also, the Exchange Privilege may be terminated or
revised at any time by the Fund and/or any of the Dean Witter funds for
whichshares of the Fund have been exchanged, upon such notice as may be
required by applicable regulatory agencies (presently sixty days' prior
written notice for termination or material revision), provided that six
months' prior written notice of termination will be given to the shareholders
who hold shares of Exchange Funds pursuant to the Exchange Privilege, and
provided further that the Exchange Privilege may be terminated or materially
revised without notice at times (a) when the New York Stock Exchange is
closed for other than customary weekends and holidays, (b) when trading on
that Exchange is restricted, (c) when an emergency exists as a result of
which disposal by the Fund of securities owned by it is not reasonably
practicable or it is not reasonably practicable for the Fund fairly to
determine the value of its net assets, (d) during any other period when the
Securities and Exchange Commission by order so permits (provided that
applicable rules and regulations of the Securities and Exchange Commission
shall govern as to whether the conditions prescribed in (b) or (c) exist) or
(e) if the Fund would be unable to invest amounts effectively in accordance
with its investment objective, policies and restrictions.
For further information regarding the Exchange Privilege, shareholders
should contact their DWR or other selected broker-dealer account executive or
the Transfer Agent.
REDEMPTIONS AND REPURCHASES
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Redemption. As stated in the Prospectus, shares of each Class of the Fund
can be redeemed for cash at any time at the net asset value per share next
determined; however, such redemption proceeds will be reduced by the amount
of any applicable CDSC. If shares are held in a shareholder's account without
a share certificate, a written request for redemption to the Fund's Transfer
Agent at P.O. Box 983, Jersey City, NJ 07303 is required. If certificates are
held by the shareholder, the shares may be redeemed by surrendering the
certificates with a written request for redemption. The share certificate, or
an accompanying stock power, and the request for redemption, must be signed
by the shareholder or shareholders exactly as the shares are registered. Each
request for redemption, whether or not accompanied by a share certificate,
must be sent to the Fund's Transfer Agent, which will redeem the shares at
their net asset value next computed (see "Purchase of Fund Shares") after it
receives the request, and certificate, if any, in good order. Any redemption
request received after such computation will be redeemed at the next
determined net asset value. The term "good order" means that the share
certificate, if any, and request for redemption are properly signed,
accompanied by any documentation required by the Transfer Agent, and bear
signature guarantees when required by the Fund or the Transfer Agent. If
redemption is requested by a corporation, partnership, trust or fiduciary,
the Transfer Agent may require that written evidence of authority acceptable
to the Transfer Agent be submitted before such request is accepted.
Whether certificates are held by the shareholder or shares are held in a
shareholder's account, if the proceeds are to be paid to any person other
than the record owner, or if the proceeds are to be paid to a corporation
(other than the Distributor or a selected broker-dealer for the account of
the shareholder), partnership, trust or fiduciary, or sent to the shareholder
at an address other than the registered address,
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signatures must be guaranteed by an eligible guarantor acceptable to the
Transfer Agent (shareholders should contact the Transfer Agent for a
determination as to whether a particular institution is such an eligible
guarantor). A stock power may be obtained from any dealer or commercial bank.
The Fund may change the signature guarantee requirements from time to time
upon notice to shareholders, which may be by means of a supplement to the
prospectus or a new prospectus.
Repurchase. As stated in the Prospectus, DWR and other selected
broker-dealers are authorized to repurchase shares represented by a share
certificate which is delivered to any of their offices. Shares held in a
shareholder's account without a share certificate may also be repurchased by
DWR and other selected broker-dealers upon the telephonic request of the
shareholder. The repurchase price is the net asset value next computed after
such purchase order is received by DWR or other selected broker-dealer
reduced by any applicable CDSC.
Payment for Shares Redeemed or Repurchased. As discussed in the
Prospectus, payment for shares of any Class presented for repurchase or
redemption will be made by check within seven days after receipt by the
Transfer Agent of the certificate and/or written request in good order. Such
payment may be postponed or the right of redemption suspended at times (a)
when the New York Stock Exchange is closed for other than customary weekends
and holidays, (b) when trading on that Exchange is restricted, (c) when an
emergency exists as a result of which disposal by the Fund of securities
owned by it is not reasonably practicable or it is not reasonably practicable
for the Fund fairly to determine the value of its net assets, or (d) during
any other period when the Securities and Exchange Commission by order so
permits; provided that applicable rules and regulations of the Securities and
Exchange Commission shall govern as to whether the conditions prescribed in
(b) or (c) exist. If the shares to be redeemed have recently been purchased
by check, payment of the redemption proceeds may be delayed for the minimum
time needed to verify that the check used for investment has been honored
(not more than fifteen days from the time of receipt of the check by the
Transfer Agent). It has been and remains the Fund's policy and practice that,
if checks for redemption proceeds remain uncashed, no interest will accrue on
amounts represented by such uncashed checks. Shareholders maintaining margin
accounts with DWR or another selected broker-dealer are referred to their
account executive regarding restrictions on redemption of shares of the Fund
pledged in the margin account.
Transfers of Shares. In the event a shareholder requests a transfer of any
shares to a new registration, such shares will be transferred without sales
charge at the time of transfer. With regard to the status of shares which are
either subject to the CDSC or free of such charge (and with regard to the
length of time shares subject to the charge have been held), any transfer
involving less than all 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.
Reinstatement Privilege. As discussed in the Prospectus, a shareholder who
has had his or her shares redeemed or repurchased and has not previously
exercised this reinstatement privilege may, within 35 days after the date of
redemption or repurchase, reinstate any portion or all of the proceeds of
such redemption or repurchase in shares of the Fund in the same Class at the
net asset value next determined after a reinstatement request, together with
the proceeds, is received by the Transfer Agent.
Exercise of the reinstatement privilege will not affect the federal income
tax treatment of any gain or loss realized upon the redemption or repurchase,
except that if the redemption or repurchase resulted in a loss and
reinstatement is made in shares of the Fund, some or all of the loss,
depending on the amount reinstated, will not be allowed as a deduction for
federal income tax purposes but will be applied to adjust the cost basis of
the shares acquired upon reinstatement.
DIVIDENDS, DISTRIBUTIONS AND TAXES
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As discussed in the Prospectus under "Dividends, Distributions and Taxes,"
the Fund will determine either to distribute or to retain all or part of any
net long-term capital gains in any year for reinvestment.
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If any such gains are retained, the Fund will pay federal income tax thereon,
and shareholders at year-end will be able to claim their share of the tax
paid by the Fund as a credit against their individual federal income tax.
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 regulations applicable to the Fund may have the effect of causing
the Fund to recognize a gain or loss for tax purposes before the gain or loss
is realized, or to defer recognition of a realized loss for tax purposes.
Recognition, for taxes purposes, of an unrealized loss may result in a lesser
amount of the Fund's realized gains being available for annual distribution.
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 twelve months. Gains or losses on the sale of securities with a tax
holding period of twelve months or less will be short-term gains or losses.
Distributions of net long-term capital gains, if any, are taxable to
shareholders as long-term capital gains regardless of how long a shareholder
has held the Fund's shares and regardless of whether the distribution is
received in additional shares or in cash. Capital gains distributions are not
eligible for the dividends received deduction. The Treasury intends to issue
regulations to permit shareholders to take into account their proportionate
share of the Fund's capital gains distributions that will be subject to a
reduced rate under the Taxpayer Relief Act of 1997. The Taxpayer Relief Act
reduces the maximum tax on long-term capital gains from 28% to 20%; however,
it also lengthens the required holding period to obtain the lower rate from
more than 12 months to more than 18 months. The lower rates do not apply to
collectibles and certain other assets. Additionally, the maximum capital gain
rate for assets that are held more than five years and that are acquired
after December 31, 2000 is 18%.
The Fund intends to remain qualified as a regulated investment company
under Subchapter M of the Internal Revenue Code of 1986 (the "Code"). As
such, the Fund will not be subject to federal income tax on its net
investment income and capital gains, if any, realized during any fiscal year
in which it distributes such income and capital gains to its shareholders. In
addition, the Fund intends to distribute to its shareholders each calendar
year a sufficient amount of ordinary income and capital gains to avoid the
imposition of a 4% excise tax. Shareholders will normally have to pay federal
income taxes, and any state and/or local income taxes, on the dividends and
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. Any dividends declared in the last quarter of any calendar year which
are paid in the following year prior to February 1 will be deemed received by
the shareholder in the prior year.
As stated under "Investment Practices and Policies," the Fund may invest
up to 35% of its portfolio in securities other than common stocks, including
U.S. Government securities. Under current federal tax law, the Fund will
receive net investment income in the form of interest by virtue of holding
Treasury bills, notes and bonds, and will recognize income attributable to it
from holding zero coupon Treasury securities. 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 payment in cash on the
security during the year. As an investment company, the Fund must pay out
substantially all of its net investment income each year. Accordingly, the
Fund, to the extent it invests in zero coupon Treasury securities, may be
required to pay out as an income distribution each year an amount which is
greater than the total amount of cash receipts of interest the Fund actually
received. 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.
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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, capital gains
distributions and some portion of the dividends are subject to federal income
taxes. If the net asset value of the shares should be reduced below a
shareholder's cost as a result of the payment of dividends or the
distribution of realized long-term capital gains, such payment or
distribution would be in part a return of capital 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.
Any loss realized by shareholders upon a 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 during
the six-month period.
Shareholders are urged to consult their attorneys or tax advisers
regarding specific questions as to federal, state or local taxes.
PERFORMANCE INFORMATION
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As discussed in the Prospectus, 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 ending redeemable value is reduced
by any CDSC at the end of the one, five or ten year or other period. For the
purpose of this calculation, it is assumed that all dividends and
distributions are reinvested. The formula for computing the average annual
total return involves a percentage obtained by dividing the ending redeemable
value by the amount of the initial investment, taking a root of the quotient
(where the root is equivalent to the number of years in the period) and
subtracting 1 from the result. The average annual total returns for Class B
for the one, five and ten year periods ended December 31, 1997, were 26.55%,
17.80% and 17.73%, respectively.
For periods of less than one year, the Fund quotes its total return on a
non-annualized basis. Accordingly, the Fund may compute its aggregate total
return for each of Class A, Class C and Class D for specified periods by
determining the aggregate percentage rate which will result in the ending
value of a hypothetical $1,000 investment made at the beginning of the
period. For the purpose of this calculation, it is assumed that all dividends
and distributions are reinvested. The formula for computing aggregate total
return involves a percentage obtained by dividing the ending value by the
initial $1,000 investment and subtracting 1 from the result. The ending
redeemable value is reduced by any CDSC at the end of the period. Based on
the foregoing calculations, the total returns for the period July 28, 1997
through December 31, 1997 were 2.05%, 6.46% and 7.83% for Class A, Class C
and Class D, respectively.
In addition to the foregoing, the Fund may advertise its total return for
each Class over different periods of time by means of aggregate, average,
year-by-year or other types of total return figures. Such calculations may or
may not reflect the imposition of the maximum front-end sales charge for
Class A or the deduction of the CDSC for each of Class B and Class C which,
if reflected, would reduce the performance quoted. For example, the average
annual total return of the Fund may be calculated in the manner described
above, but without deduction for any applicable sales charge. Based on this
calculation, the average annual total returns of Class B for the one, five
and ten year periods ended December 31, 1997, were 31.55%, 18.01% and 17.73%,
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
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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 for Class B for
the one, five and ten year period ended December 31, 1997, were 31.55%,
128.87% and 411.49%, respectively. Based on the foregoing calculations, the
total returns for Class A, Class C and Class D for the period July 28 through
December 31, 1997 were 7.70%, 7.39% and 7.83%, 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 December 31, 1997:
<TABLE>
<CAPTION>
INVESTMENT AT INCEPTION OF:
INCEPTION --------------------------------
CLASS DATE: $10,000 $50,000 $100,000
- ---------- ----------- --------- --------- -----------
<S> <C> <C> <C> <C>
Class A .. 7/28/97 $ 10,205 $ 51,696 $ 104,469
Class B.... 3/27/80 124,526 622,630 1,245,260
Class C.... 7/28/97 10,739 53,695 107,390
Class D.... 7/28/97 10,783 53,915 107,830
</TABLE>
The Fund from time to time may also advertise its performance relative to
certain performance rankings and indexes compiled by independent
organizations.
SHARES OF THE FUND
- -----------------------------------------------------------------------------
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 of the Trustees have
been elected by the shareholders of the Fund, most recently at a Special
Meeting of Shareholders held on May 21, 1997. 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. Under certain
circumstances the Trustees may be removed by action of the Trustees. The
shareholders also have the right under certain circumstances to remove the
Trustees. The voting rights of shareholders are not cumulative, so that
holders of more than 50 percent of the shares voting can, if they choose,
elect all Trustees being selected, while the holders of the remaining shares
would be unable to elect any Trustees.
The Declaration of Trust permits the Trustees to authorize the creation of
additional series of shares (the proceeds of which would be invested in
separate, independently managed portfolios) and additional classes of shares
within any series. The Trustees have not currently authorized any such
additional series or classes of shares other than as set forth in the
Prospectus.
The Declaration of Trust further 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.
The Fund is authorized to issue an unlimited number of shares of
beneficial interest.
The Fund shall be of unlimited duration subject to the provisions in the
Declaration of Trust concerning termination by action of the shareholders or
the Trustees.
44
<PAGE>
CUSTODIAN AND TRANSFER AGENT
- -----------------------------------------------------------------------------
The Bank of New York, 90 Washington Street, New York, New York 10286 is
the Custodian of the Fund's assets. Any of the Fund's cash balances with the
Custodian in excess of $100,000 are unprotected by federal deposit insurance.
Such balances may, at times, be substantial.
Morgan Stanley Dean Witter Trust FSB ("MSDW Trust"), Harborside Financial
Center, Plaza Two, Jersey City, New Jersey 07311 is the Transfer Agent of the
Fund's shares and Dividend Disbursing Agent for payment of dividends and
distributions on Fund shares and Agent for shareholders under various
investment plans described herein. MSDW Trust is an affiliate of Dean Witter
InterCapital Inc., the Fund's Investment Manager, and of Dean Witter
Distributors Inc., the Fund's Distributor. As Transfer Agent and Dividend
Disbursing Agent, MSDW Trust's responsibilities include maintaining
shareholder accounts, disbursing cash dividends and reinvesting dividends,
processing account registration changes, handling purchase and redemption
transactions, mailing prospectuses and reports, mailing and tabulating
proxies, processing share certificate transactions, and maintaining
shareholder records and lists. For these services MSDW Trust receives a per
shareholder account fee from the Fund.
INDEPENDENT ACCOUNTANTS
- -----------------------------------------------------------------------------
Price Waterhouse LLP serves as the independent accountants of the Fund.
The independent accountants are responsible for auditing the annual financial
statements of the Fund.
REPORTS TO SHAREHOLDERS
- -----------------------------------------------------------------------------
The Fund will send to shareholders, at least semi-annually, reports
showing the Fund's portfolio and other information. An annual report,
containing financial statements audited by independent accountants, will be
sent to shareholders each year.
The Fund's fiscal year is the calendar year. The financial statements of
the Fund must be audited at least once a year by independent accountants
whose selection is made annually by the Fund's Board of Trustees.
LEGAL COUNSEL
- -----------------------------------------------------------------------------
Barry Fink, Esq., who is an officer and the General Counsel of the
Investment Manager, is an officer and the General Counsel of the Fund.
EXPERTS
- -----------------------------------------------------------------------------
The financial statements of the Fund for the fiscal year ended December
31, 1997 included in the Statement of Additional Information and incorporated
by reference in the Prospectus have been so included and incorporated in
reliance on the report of Price Waterhouse LLP, independent accountants,
given on the authority of said firm as experts in auditing and accounting.
REGISTRATION STATEMENT
- -----------------------------------------------------------------------------
This Statement of Additional Information and the Prospectus do not contain
all of the information set forth in the Registration Statement the Fund has
filed with the Securities and Exchange Commission. The complete Registration
Statement may be obtained from the Securities and Exchange Commission upon
payment of the fee prescribed by the rules and regulations of the Commission.
45
<PAGE>
DEAN WITTER AMERICAN VALUE FUND
PORTFOLIO OF INVESTMENTS December 31, 1997
<TABLE>
<CAPTION>
NUMBER OF
SHARES VALUE
- ---------------------------------------------------------------------------------------------
<S> <C> <C>
COMMON STOCKS (86.0%)
Agriculture Related (1.3%)
400,000 Dekalb Genetics Corp. (Class B) ................................. $ 15,700,000
516,667 Delta & Pine Land Co. .......................................... 15,758,343
200,000 Pioneer Hi-Bred International, Inc. ............................ 21,450,000
--------------
52,908,343
--------------
Auto Related (0.1%)
127,900 Budget Group, Inc. (Class A)* ................................... 4,420,544
--------------
Banks (9.8%)
350,000 Ahmanson (H.F.) & Co. .......................................... 23,428,125
105,000 AmSouth Bancorporation .......................................... 5,702,812
75,000 City National Corp. ............................................ 2,770,312
130,000 Comerica, Inc. ................................................. 11,732,500
17,450,000 Credito Italiano SpA (Italy) .................................... 53,823,613
275,000 Crestar Financial Corp. ........................................ 15,675,000
687,000 Dime Bancorp, Inc. ............................................. 20,781,750
205,000 First Security Corp. ........................................... 8,584,375
150,000 First Tennessee National Corp. ................................. 10,012,500
205,000 First Union Corp. .............................................. 10,506,250
340,000 Mellon Bank Corp. .............................................. 20,612,500
200,000 Northern Trust Corp. ........................................... 13,950,000
1,200,000 Norwest Corp. .................................................. 46,350,000
360,000 PNC Bank Corp. ................................................. 20,542,500
185,000 Southtrust Corp. ............................................... 11,701,250
200,000 Summit Bancorp .................................................. 10,650,000
245,000 U.S. Bancorp .................................................... 27,424,687
100,000 Union Planters Corp. ............................................ 6,793,750
410,000 Washington Mutual, Inc. ........................................ 26,137,500
170,000 Wells Fargo & Co. .............................................. 57,704,375
93,200 Zions Bancorporation ............................................ 4,194,000
--------------
409,077,799
--------------
Beverages -Soft Drinks (0.1%)
41,900 Coca Cola Co. ................................................... 2,791,587
--------------
Biotechnology (2.2%)
350,000 Alkermes, Inc.* ................................................. 6,868,750
870,000 Biochem Pharma, Inc. (Canada)* .................................. 18,106,875
881,000 Centocor, Inc.* ................................................. 29,293,250
300,000 Genzyme Corp. General Division* ................................ 8,287,500
375,000 Gilead Sciences, Inc.* .......................................... 14,343,750
385,000 IDEC Pharmaceuticals Corp.* ..................................... 13,234,375
--------------
90,134,500
--------------
Cable & Telecommunications (2.2%)
324,000 Comcast Corp. (Class A) ......................................... $ 10,287,000
1,090,000 Comcast Corp. (Class A Special) ................................. 34,335,000
550,000 Cox Communications, Inc. (Class A)* ............................. 22,034,375
900,000 Tele-Communications, Inc. (Class A)* ............................ 25,087,500
--------------
91,743,875
--------------
Cable Television Equipment (0.4%)
300,000 CIENA Corp.* .................................................... 18,337,500
--------------
Capital Goods (0.6%)
325,000 General Electric Co. ............................................ 23,846,875
--------------
Communications Equipment (0.2%)
180,000 Cisco Systems, Inc.* ............................................ 10,035,000
--------------
Computer Services (0.5%)
400,000 Paychex, Inc. ................................................... 20,250,000
--------------
Computer Software (4.5%)
320,000 BMC Software, Inc.* ............................................. 20,960,000
69,000 Citrix Systems, Inc.* ........................................... 5,244,000
Computer Associates
800,000 International, Inc. ............................................ 42,300,000
730,000 Compuware Corp.* ................................................ 23,360,000
117,500 Manugistics Group, Inc.* ........................................ 5,214,062
1,000,000 PeopleSoft, Inc.* ............................................... 38,750,000
510,000 Platinum Technology, Inc.* ...................................... 14,407,500
40,000 SAP AG (Pref.)(Germany) ......................................... 13,092,325
440,500 Veritas Software Corp.* ......................................... 22,300,312
--------------
185,628,199
--------------
Consumer Business Services (2.2%)
700,000 Automatic Data Processing, Inc. ................................. 42,962,500
500,000 Corrections Corp. of America* ................................... 18,531,250
635,000 Sysco Corp. ..................................................... 28,932,187
--------------
90,425,937
--------------
Consumer -Products (10.5%)
385,000 Alberto-Culver Co. (Class B) .................................... 12,344,062
875,000 Albertson's, Inc. ............................................... 41,453,125
400,000 Clorox Co. ...................................................... 31,625,000
600,000 CVS Corp. ....................................................... 38,437,500
1,020,000 Fred Meyer, Inc.* ............................................... 37,102,500
500,000 Heinz (H.J.) Co. ................................................ 25,406,250
1,000,000 Kroger Co.* ..................................................... 36,937,500
920,000 Nabisco Holdings Corp. (Class A) ................................ 44,562,500
SEE NOTES TO FINANCIAL STATEMENTS
46
<PAGE>
DEAN WITTER AMERICAN VALUE FUND
PORTFOLIO OF INVESTMENTS December 31, 1997, continued
NUMBER OF
SHARES VALUE
- ---------------------------------------------------------------------------------------------
100,000 Procter & Gamble Co. ........................................... $ 7,981,250
475,000 Quaker Oats Company (The) ....................................... 25,056,250
700,000 Rite Aid Corp. ................................................. 41,081,250
699,000 Safeway, Inc.* .................................................. 44,211,750
200,000 Sara Lee Corp. .................................................. 11,262,500
1,300,000 Walgreen Co. .................................................... 40,787,500
--------------
438,248,937
--------------
Drugs (6.1%)
425,000 Bristol-Myers Squibb Co. ....................................... 40,215,625
240,000 Cardinal Health, Inc. .......................................... 18,030,000
215,000 Dura Pharmaceuticals, Inc.* ..................................... 9,863,125
620,000 Lilly (Eli) & Co. .............................................. 43,167,500
200,000 Medicis Pharmaceutical Corp. (Class A)* ......................... 10,250,000
12,000 Novartis AG (Switzerland) ....................................... 19,459,459
530,000 Pfizer, Inc. .................................................... 39,518,125
645,000 Schering-Plough Corp. .......................................... 40,070,625
271,000 Warner-Lambert Co. ............................................. 33,604,000
--------------
254,178,459
--------------
Finance (1.1%)
800,000 Fannie Mae ...................................................... 45,650,000
--------------
Financial -Miscellaneous (6.0%)
205,000 American Express Co. ........................................... 18,296,250
Associates First Capital Corp.
190,000 (Class A) ....................................................... 13,513,750
300,000 Donaldson, Lufkin & Jenrette, Inc. .............................. 23,850,000
504,050 Edwards (A.G.), Inc. ........................................... 20,035,987
965,000 Freddie Mac ..................................................... 40,469,687
700,000 Hambrecht & Quist Group* ........................................ 25,550,000
2,800 Legg Mason, Inc. ............................................... 156,625
400,000 Lehman Brothers Holdings, Inc. .................................. 20,400,000
650,000 Merrill Lynch & Co., Inc. ...................................... 47,409,375
605,500 Paine Webber Group, Inc. ........................................ 20,927,594
91,500 Price (T. Rowe) Associates, Inc. ............................... 5,753,063
274,600 Providian Financial Corp. ....................................... 12,408,488
--------------
248,770,819
--------------
Healthcare -Diversified (0.4%)
470,000 General Nutrition Companies, Inc.* ............................. 15,921,250
--------------
Healthcare Products & Services (3.7%)
1,000,000 HBO & Co. ...................................................... 47,937,500
1,650,000 Health Management Associates, Inc. (Class A)* ................... 41,662,500
1,200,000 Healthsouth Corp.* .............................................. $ 33,300,000
398,100 Renal Treatment Centers, Inc.* .................................. 14,381,363
583,333 Total Renal Care Holdings, Inc.* ................................ 16,041,658
--------------
153,323,021
--------------
Hotels/Motels (1.1%)
1,393,798 Cendant Corp.* .................................................. 47,911,806
--------------
Household Products (0.4%)
360,000 Sunbeam Corporation, Inc. ...................................... 15,165,000
--------------
Insurance (3.7%)
441,000 Allstate Corp. .................................................. 40,075,875
120,000 Hartford Financial Services Group Inc. .......................... 11,227,500
250,000 Lincoln National Corp. .......................................... 19,531,250
133,470 Marsh & McLennan Companies, Inc. ................................ 9,951,857
401,000 SunAmerica Inc. ................................................. 17,142,750
125,000 Torchmark Corp. ................................................ 5,257,813
950,000 Travelers Group, Inc. ........................................... 51,181,250
--------------
154,368,295
--------------
Internet (2.3%)
600,000 America Online, Inc.* ........................................... 53,512,500
300,000 Check Point Software Technologies Ltd. (Israel)* ................ 12,225,000
260,000 CheckFree Holdings Corp.* ....................................... 7,020,000
345,000 Yahoo! Inc.* .................................................... 23,891,250
--------------
96,648,750
--------------
Machinery -Diversified (0.2%)
164,800 Thermo Electron Corp.* ......................................... 7,333,600
--------------
Media Group (9.3%)
1,610,000 CBS Corp. ....................................................... 47,394,375
689,500 Chancellor Media Corp.* ......................................... 51,453,938
450,000 Clear Channel Communications, Inc.* ............................. 35,746,875
701,000 Gannett Co., Inc. ............................................... 43,330,563
300,000 HSN, Inc.* ...................................................... 15,450,000
438,000 Jacor Communications, Inc.* ..................................... 23,268,750
400,000 News Corp., Ltd. (ADR)(Australia) ............................... 8,925,000
650,000 Outdoor Systems, Inc.* .......................................... 24,943,750
760,000 Time Warner, Inc. ............................................... 47,120,000
483,100 Tribune Co. .................................................... 30,072,975
325,000 Universal Outdoor Holdings, Inc.* .............................. 16,900,000
SEE NOTES TO FINANCIAL STATEMENTS
47
<PAGE>
DEAN WITTER AMERICAN VALUE FUND
PORTFOLIO OF INVESTMENTS December 31, 1997, continued
NUMBER OF
SHARES VALUE
- ---------------------------------------------------------------------------------------------
306,600 Univision Communications, Inc. (Class A)* .......................$ 21,404,513
500,000 Viacom, Inc. (Class B)* ......................................... 20,718,750
--------------
386,729,489
--------------
Medical Supplies (1.9%)
450,000 Guidant Corp. ................................................... 28,012,500
500,000 Medtronic, Inc. ................................................. 26,156,250
200,000 Mentor Corp. .................................................... 7,300,000
285,300 Sofamor Danek Group, Inc.* ...................................... 18,562,331
--------------
80,031,081
--------------
Miscellaneous (0.7%)
480,000 Equitable Companies, Inc. ....................................... 23,880,000
169,000 Excite, Inc.* ................................................... 5,070,000
--------------
28,950,000
--------------
Recreation (0.5%)
205,000 Walt Disney Co. ................................................. 20,307,813
--------------
Restaurants (0.3%)
385,000 Cracker Barrel Old Country Store, Inc. .......................... 12,849,375
--------------
Retail (7.0%)
401,000 Barnes & Noble, Inc.* ........................................... 13,383,375
1,500,000 Costco Companies, Inc.* ......................................... 66,843,750
646,000 Dayton-Hudson Corp. ............................................. 43,605,000
527,500 Dollar General Corp. ............................................ 19,121,875
295,000 Family Dollar Stores, Inc. ...................................... 8,647,188
600,000 Gap, Inc. ....................................................... 21,262,500
700,000 Home Depot, Inc. ............................................... 41,212,500
361,100 Lowe's Companies, Inc. ......................................... 17,219,956
543,000 Mattel, Inc. ................................................... 20,226,750
350,000 Proffitt's, Inc.* ............................................... 9,953,125
740,000 Wal-Mart Stores, Inc. ........................................... 29,183,750
--------------
290,659,769
--------------
Telecommunications (1.6%)
750,000 LCI International, Inc.* ........................................ 23,062,500
800,000 Teleport Communications Group Inc.* ............................. 43,900,000
--------------
66,962,500
--------------
Transportation (0.9%)
500,000 OMI Corp.* ...................................................... 4,593,750
557,000 US Airways Group Inc.* .......................................... 34,812,500
--------------
39,406,250
--------------
Utilities (3.9%)
400,000 Ameritech Corp. .................................................$ 32,200,000
386,000 Bell Atlantic Corp. ............................................ 35,126,000
550,000 Consolidated Edison Co. of New York, Inc. ....................... 22,550,000
400,000 FPL Group, Inc. ................................................ 23,675,000
400,000 GTE Corp. ....................................................... 20,900,000
150,000 New York State Electric & Gas Corp. ............................ 5,325,000
455,000 U.S. West Communications Group, Inc. ............................ 20,531,875
--------------
160,307,875
--------------
Utilities -Electric (0.2%)
200,000 Pinnacle West Capital Corp. ..................................... 8,475,000
--------------
Utilities -Telecommunications (0.1%)
51,500 Intermedia Communications Inc.* ................................ 3,116,286
--------------
TOTAL COMMON STOCKS
(Identified Cost $3,070,263,608) ................................ 3,574,915,534
--------------
</TABLE>
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT IN
THOUSANDS
- -----------
<S> <C> <C>
U.S. GOVERNMENT OBLIGATIONS (9.0%)
$242,000 U.S. Treasury Bond 6.375% due 08/15/27 .......................... 255,317,260
342,000 U.S. Treasury Strip 0.00% due 05/15/20 .......................... 88,916,580
107,000 U.S. Treasury Strip 0.00% due 11/15/19 .......................... 28,658,880
-------------
TOTAL U.S. GOVERNMENT OBLIGATIONS
(Identified Cost $356,519,055) .................................. 372,892,720
-------------
SHORT-TERM INVESTMENTS (7.1%)
U.S. GOVERNMENT AGENCY (a)(7.0%)
293,000 Federal Home Loan Mortgage Corp. 6.00% due 01/02/98
(Amortized Cost $292,951,167) 292,951,167
-------------
REPURCHASE AGREEMENT (0.1%)
The Bank of New York 3.875% due 01/02/98 (dated 12/31/97,
4,377 proceeds $4,377,721)(b) (Identified Cost $4,376,779) ............ 4,376,779
-------------
TOTAL SHORT-TERM INVESTMENTS
(Identified Cost $297,327,946) .................................. 297,327,946
-------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
48
<PAGE>
DEAN WITTER AMERICAN VALUE FUND
PORTFOLIO OF INVESTMENTS December 31, 1997, continued
<TABLE>
<CAPTION>
VALUE
- ------------------------------------ -------- --------------
<S> <C> <C>
TOTAL INVESTMENTS
(Identified Cost $3,724,110,609)(c) . 102.1% $4,245,136,200
LIABILITIES IN EXCESS OF OTHER
ASSETS .............................. (2.1) (89,244,700)
-------- --------------
NET ASSETS .......................... 100.0% $4,155,891,500
======== ==============
</TABLE>
- ------------
ADR American Depository Receipt.
* Non-income producing security.
(a) Security was purchased on a discount basis. The interest rate shown
has been adjusted to reflect a money market equivalent yield.
(b) Collateralized by $4,016,966 U.S. Treasury Note 7.00% due 07/15/06
valued at $4,464,314.
(c) The aggregate cost for federal income tax purposes approximates
identified cost. The aggregate gross unrealized appreciation is
$537,652,888 and the aggregate gross unrealized depreciation is
$16,627,297, resulting in net unrealized appreciation of
$521,025,591.
SEE NOTES TO FINANCIAL STATEMENTS
49
<PAGE>
DEAN WITTER AMERICAN VALUE FUND
FINANCIAL STATEMENTS
STATEMENT OF ASSETS AND LIABILITIES
December 31, 1997
<TABLE>
<CAPTION>
<S> <C>
ASSETS:
Investments in securities, at value
(identified cost $3,724,110,609)......................... $4,245,136,200
Receivable for:
Investments sold........................................ 29,647,388
Shares of beneficial interest sold...................... 8,751,357
Interest................................................ 5,827,705
Dividends............................................... 2,138,596
Prepaid expenses and other assets......................... 122,713
--------------
TOTAL ASSETS............................................ 4,291,623,959
--------------
LIABILITIES:
Payable for:
Investments purchased................................... 124,542,641
Distributions to shareholders .......................... 3,767,120
Plan of distribution fee................................ 2,946,023
Shares of beneficial interest repurchased............... 2,219,241
Investment management fee............................... 1,808,423
Accrued expenses and other payables....................... 449,011
--------------
TOTAL LIABILITIES....................................... 135,732,459
--------------
NET ASSETS ............................................. $4,155,891,500
==============
COMPOSITION OF NET ASSETS:
Paid-in-capital........................................... $3,481,928,047
Net unrealized appreciation .............................. 521,025,591
Accumulated net investment loss........................... (42,030)
Accumulated undistributed net realized gain............... 152,979,892
--------------
NET ASSETS ............................................. $4,155,891,500
==============
CLASS A SHARES:
Net Assets................................................ $ 15,843,639
Shares Outstanding (unlimited authorized, $.01 par value) 535,374
NET ASSET VALUE PER SHARE............................... $ 29.59
==============
MAXIMUM OFFERING PRICE PER SHARE,
(net asset value plus 5.54% of net asset value) ....... $ 31.23
==============
CLASS B SHARES:
Net Assets................................................ $4,078,071,882
Shares Outstanding (unlimited authorized, $.01 par value) 138,185,565
NET ASSET VALUE PER SHARE............................... $ 29.51
==============
CLASS C SHARES:
Net Assets................................................ $ 12,204,456
Shares Outstanding (unlimited authorized, $.01 par
value)................................................... 413,867
NET ASSET VALUE PER SHARE............................... $ 29.49
==============
CLASS D SHARES:
Net Assets................................................ $49,771,523
Shares Outstanding (unlimited authorized, $.01 par
value)................................................... 1,679,836
NET ASSET VALUE PER SHARE............................... $ 29.63
==============
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
50
<PAGE>
DEAN WITTER AMERICAN VALUE FUND
FINANCIAL STATEMENTS, continued
STATEMENT OF OPERATIONS
For the year ended December 31, 1997*
<TABLE>
<CAPTION>
<S> <C>
NET INVESTMENT INCOME:
INCOME
Dividends (net of $103,775 foreign
withholding tax)......................... $ 24,992,865
Interest.................................. 15,881,254
--------------
TOTAL INCOME............................ 40,874,119
--------------
EXPENSES
Plan of distribution fee (Class A
shares).................................. 7,380
Plan of distribution fee (Class B
shares).................................. 30,004,099
Plan of distribution fee (Class C
shares).................................. 26,712
Investment management fee................. 18,075,407
Transfer agent fees and expenses.......... 3,788,836
Registration fees......................... 359,919
Custodian fees............................ 228,926
Shareholder reports and notices........... 222,511
Professional fees......................... 61,757
Trustees' fees and expenses............... 15,729
Other..................................... 37,222
--------------
TOTAL EXPENSES.......................... 52,828,498
--------------
NET INVESTMENT LOSS..................... (11,954,379)
--------------
NET REALIZED AND UNREALIZED GAIN:
Net realized gain ........................ 738,335,473
Net change in unrealized appreciation .... 251,384,827
--------------
NET GAIN................................ 989,720,300
--------------
NET INCREASE.............................. $977,765,921
==============
</TABLE>
- ------------
* Class A, Class C and Class D shares were issued July 28, 1997.
SEE NOTES TO FINANCIAL STATEMENTS
51
<PAGE>
DEAN WITTER AMERICAN VALUE FUND
FINANCIAL STATEMENTS, continued
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
FOR THE YEAR FOR THE YEAR
ENDED ENDED
DECEMBER 31, 1997* DECEMBER 31, 1996
- ------------------------------------------------------ ------------------ -----------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
OPERATIONS:
Net investment loss.................................... $ (11,954,379) $ (9,041,376)
Net realized gain...................................... 738,335,473 275,397,900
Net change in unrealized appreciation.................. 251,384,827 13,163,448
------------------ -----------------
NET INCREASE......................................... 977,765,921 279,519,972
------------------ -----------------
DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income -Class B shares.................. -- (1,126,313)
Net realized gain
Class A shares........................................ (1,747,209) --
Class B shares........................................ (680,450,520) (299,891,577)
Class C shares........................................ (1,454,608) --
Class D shares........................................ (6,581,680) --
------------------ -----------------
TOTAL DIVIDENDS AND DISTRIBUTIONS.................... (690,234,017) (301,017,890)
------------------ -----------------
Net increase from transactions in shares of beneficial
interest.............................................. 769,509,113 731,461,022
------------------ -----------------
NET INCREASE......................................... 1,057,041,017 709,963,104
NET ASSETS:
Beginning of period.................................... 3,098,850,483 2,388,887,379
------------------ -----------------
END OF PERIOD
(Including net investment losses of $42,030 and
$43,257, respectively)................................ $4,155,891,500 $3,098,850,483
================== =================
</TABLE>
- ------------
* Class A, Class C and Class D shares were issued July 28, 1997.
SEE NOTES TO FINANCIAL STATEMENTS
52
<PAGE>
DEAN WITTER AMERICAN VALUE FUND
NOTES TO FINANCIAL STATEMENTS December 31, 1997
1. ORGANIZATION AND ACCOUNTING POLICIES
Dean Witter American Value 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
capital growth consistent with an effort to reduce volatility. The Fund seeks
to achieve its objective by investing in a diversified portfolio of
securities consisting principally of common stocks. The Fund was incorporated
in Maryland in 1979, commenced operations on March 27, 1980 and was
reorganized as a Massachusetts business trust on April 30, 1987. On July 28,
1997, the Fund commenced offering three additional classes of shares, with
the then current shares, other than shares which were purchased prior to
April 30, 1984 (and with respect to such shares, certain shares acquired
through reinvestment of dividends and capital gains distributions
(collectively the "Old Shares")), designated as Class B shares. The Old
Shares have been designated Class D shares.
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, 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 (in cases where a security is traded on more than one exchange, the
security is valued on the exchange designated as the primary market pursuant
to procedures adopted by the Trustees); (2) all other portfolio securities
for which over-the-counter market quotations are readily available are valued
at the latest 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 Dean Witter InterCapital Inc. (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
53
<PAGE>
DEAN WITTER AMERICAN VALUE FUND
NOTES TO FINANCIAL STATEMENTS December 31, 1997, continued
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 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 record 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.
2. INVESTMENT MANAGEMENT AGREEMENT
Pursuant to an Investment Management Agreement with the Investment Manager,
the Fund pays a management fee, accrued daily and payable monthly, by
applying the following annual rates to the net
54
<PAGE>
DEAN WITTER AMERICAN VALUE FUND
NOTES TO FINANCIAL STATEMENTS December 31, 1997, continued
assets of the Fund determined at the close of each business day: 0.625% to
the portion of daily net assets not exceeding $250 million; 0.50% to the
portion of daily net assets exceeding $250 million but not exceeding $2.5
billion and 0.475% to the portion of daily net assets exceeding $2.5 billion
but not exceeding $3.5 billion. Effective May 1, 1997, the Agreement was
amended to reduce the annual rate to 0.45% of the portion of daily net assets
in excess of $3.5 billion.
Under the terms of the Agreement, in addition to managing the Fund's
investments, the Investment Manager maintains certain of the Fund's books and
records and furnishes, at its own expense, office space, facilities,
equipment, clerical, bookkeeping and certain legal services and pays the
salaries of all personnel, including officers of the Fund who are employees
of the Investment Manager. The Investment Manager also bears the cost of
telephone services, heat, light, power and other utilities provided to the
Fund.
3. PLAN OF DISTRIBUTION
Shares of the Fund are distributed by Dean Witter Distributors Inc. (the
"Distributor"), an affiliate of the Investment Manager. The Fund has adopted
a Plan of Distribution (the "Plan") pursuant to Rule 12b-1 under the Act. The
Plan provides that the Fund will pay the Distributor a fee which is accrued
daily and paid monthly at the following annual rates: (i) Class A -up to
0.25% of the average daily net assets of Class A; (ii) Class B -1.0% of the
lesser of: (a) the average daily aggregate gross sales of the Class B shares
since the inception of the Fund (not including reinvestment of dividend or
capital gain distributions) less the average daily aggregate net asset value
of the Class B shares redeemed since the Fund's inception upon which a
contingent deferred sales charge has been imposed or waived; or (b) the
average daily net assets of Class B; and (iii) Class C -up to 1.0% of the
average daily net assets of Class C. In the case of Class A shares, amounts
paid under the Plan are paid to the Distributor for services provided. In the
case of Class B and Class C shares, amounts paid under the Plan are paid to
the Distributor for services provided and the expenses borne by it and others
in the distribution of the shares of these Classes, including the payment of
commissions for sales of these Classes and incentive compensation to, and
expenses of, the account executives of Dean Witter Reynolds Inc. ("DWR"), an
affiliate of the Investment Manager and Distributor, and others who engage in
or support distribution of the shares or who service shareholder accounts,
including overhead and telephone expenses; printing and distribution of
prospectuses and reports used in connection with the offering of these shares
to other than current shareholders; and preparation, printing and
distribution of sales literature and advertising materials. In addition, the
Distributor may utilize fees paid pursuant to the Plan, in the case of Class
B
55
<PAGE>
DEAN WITTER AMERICAN VALUE FUND
NOTES TO FINANCIAL STATEMENTS December 31, 1997, continued
shares, to compensate DWR and other selected broker-dealers for their
opportunity costs in advancing such amounts, which compensation would be in
the form of a carrying charge on any unreimbursed expenses.
In the case of Class B shares, 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, including carrying charges, totaled $72,540,376 at December
31, 1997.
In the case of Class A shares and Class C shares, expenses incurred pursuant
to the Plan in any calendar year in excess of 0.25% or 1.0% of the average
daily net assets of Class A or Class C, respectively, will not be reimbursed
by the Fund through payments in any subsequent year, except that expenses
representing a gross sales credit to account executives may be reimbursed in
the subsequent calendar year. For the period ended December 31, 1997, 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 December 31,
1997, it received contingent deferred sales charges from certain redemptions
of the Fund's Class B shares and Class C shares of $4,721,534 and $3,192,
respectively and received $202,038 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 December 31, 1997
aggregated $9,245,904,533 and $9,254,551,447, respectively. Included in the
aforementioned are purchases and sales of U.S. Government securities of
$410,926,244 and $180,464,206, respectively.
For the year ended December 31, 1997, the Fund incurred $1,122,089 in
brokerage commissions with DWR for portfolio transactions executed on behalf
of the Fund.
At December 31, 1997, the Fund's payable for investments purchased included
unsettled trades with DWR of $8,367,064.
56
<PAGE>
DEAN WITTER AMERICAN VALUE FUND
NOTES TO FINANCIAL STATEMENTS December 31, 1997, continued
For the period May 31, 1997 through December 31, 1997, the Fund incurred
brokerage commissions of $551,901 with Morgan Stanley & Co., Inc., an
affiliate of the Investment Manager since May 31, 1997, for portfolio
transactions executed on behalf of the Fund. At December 31, 1997 the Fund's
payable for investments purchased and receivable for investments sold
included unsettled trades with Morgan Stanley & Co., Inc., of $4,206,932 and
$4,914,567, respectively.
Dean Witter Trust FSB, an affiliate of the Investment Manager and
Distributor, is the Fund's transfer agent. At December 31, 1997, the Fund had
transfer agent fees and expenses payable of approximately $54,000.
The Fund has an unfunded noncontributory defined benefit pension plan
covering all independent Trustees of the Fund who will have served as
independent Trustees for at least five years at the time of retirement.
Benefits under this plan are based on years of service and compensation
during the last five years of service. Aggregate pension costs for the year
ended December 31, 1997 included in Trustees' fees and expenses in the
Statement of Operations amounted to $4,301. At December 31, 1997, the Fund
had an accrued pension liability of $42,030 which is included in accrued
expenses in the Statement of Assets and Liabilities.
5. FEDERAL INCOME TAX STATUS
As of December 31, 1997, 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 permanent differences accumulated net
realized gain was charged $11,955,606 and accumulated net investment loss was
credited $11,955,606.
57
<PAGE>
DEAN WITTER AMERICAN VALUE FUND
NOTES TO FINANCIAL STATEMENTS December 31, 1997, continued
6. SHARES OF BENEFICIAL INTEREST
Transactions in shares of beneficial interest were as follows:
<TABLE>
<CAPTION>
FOR THE YEAR FOR THE YEAR
ENDED ENDED
DECEMBER 31, 1997+ DECEMBER 31, 1996
------------------------------- ------------------------------
SHARES AMOUNT SHARES AMOUNT
-------------- --------------- -------------- --------------
<S> <C> <C> <C> <C>
CLASS A SHARES*
Sold ....................................... 539,039 $ 17,439,944 -- --
Reinvestment of distributions............... 57,321 1,665,172 -- --
Redeemed.................................... (60,986) (2,023,896) -- --
-------------- --------------- -------------- --------------
Net increase -Class A....................... 535,374 17,081,220 -- --
-------------- --------------- -------------- --------------
CLASS B SHARES
Sold ....................................... 26,893,089 818,085,006 36,925,212 $1,016,961,498
Reinvestment of dividends and
distributions.............................. 22,224,675 644,669,591 10,599,054 286,147,878
Redeemed ................................... (24,498,814) (739,128,498) (20,736,856) (571,648,354)
-------------- --------------- -------------- --------------
Net increase -Class B....................... 24,618,950 723,626,099 26,787,410 731,461,022
-------------- --------------- -------------- --------------
CLASS C SHARES*
Sold ....................................... 387,776 12,691,589 -- --
Reinvestment of distributions............... 46,319 1,340,948 -- --
Redeemed ................................... (20,228) (667,646) -- --
-------------- --------------- -------------- --------------
Net increase -Class C....................... 413,867 13,364,891 -- --
-------------- --------------- -------------- --------------
CLASS D SHARES*
Sold ....................................... 332,349 10,839,979 -- --
Reinvestment of distributions............... 208,632 6,067,022 -- --
Redeemed ................................... (45,049) (1,470,098) -- --
-------------- --------------- -------------- --------------
Net increase -Class D....................... 495,932 15,436,903 -- --
-------------- --------------- -------------- --------------
Net increase in Fund ....................... 26,064,123 $ 769,509,113 26,787,410 $ 731,461,022
============== =============== ============== ==============
</TABLE>
- ------------
+ On July 28, 1997, 1,183,904 shares representing $37,731,024 were
transferred to Class D.
* For the period July 28, 1997 (issue date) through December 31, 1997.
58
<PAGE>
DEAN WITTER AMERICAN VALUE FUND
FINANCIAL HIGHLIGHTS
Selected ratios and per share data for a share of beneficial interest
outstanding throughout each period:
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
------------------------------------------------------------
1997*++ 1996 1995 1994 1993 1992
- ----------------------------- --------- --------- -------- --------- --------- --------
<S> <C> <C> <C> <C> <C> <C>
CLASS B SHARES
PER SHARE OPERATING
PERFORMANCE:
Net asset value, beginning of
period ...................... $27.01 $27.16 $21.21 $23.10 $20.93 $20.66
--------- --------- -------- --------- --------- --------
Net investment income (loss) . (0.10) (0.08) 0.01 -- (0.09) 0.03
Net realized and unrealized
gain (loss) ................. 8.34 2.86 8.87 (1.57) 3.94 0.71
--------- --------- -------- --------- --------- --------
Total from investment
operations .................. 8.24 2.78 8.88 (1.57) 3.85 0.74
--------- --------- -------- --------- --------- --------
Less dividends and
distributions from:
Net investment income ...... -- (0.01) -- -- (0.01) (0.03)
Net realized gain ........... (5.74) (2.92) (2.93) (0.32) (1.67) (0.44)
Paid-in-capital ............. -- -- -- -- -- --
--------- --------- -------- --------- --------- --------
Total dividends and
distributions ............... (5.74) (2.93) (2.93) (0.32) (1.68) (0.47)
--------- --------- -------- --------- --------- --------
Net asset value, end of
period ...................... $29.51 $27.01 $27.16 $21.21 $23.10 $20.93
========= ========= ======== ========= ========= ========
TOTAL INVESTMENT RETURN+ .... 31.55% 10.53% 42.20% (6.75)% 18.70% 3.84%
RATIOS TO AVERAGE NET ASSETS:
Expenses...................... 1.46% 1.53% 1.61% 1.71% 1.61% 1.72%
Net investment income (loss) . (0.34)% (0.33)% 0.06% 0.01% (0.59)% 0.18%
SUPPLEMENTAL DATA:
Net assets, end of period, in
millions..................... $4,078 $3,099 $2,389 $1,490 $1,218 $459
Portfolio turnover rate ..... 275% 279% 256% 295% 276% 305%
--
Average commission rate paid $0.0563 $0.0590 -- -- --
</TABLE>
(RESTUBBED TABLE CONTINUED FROM ABOVE)
<TABLE>
<CAPTION>
1991 1990 1989 1988
- ----------------------------- -------- --------- -------- --------
<S> <C> <C> <C> <C> <C>
CLASS B SHARES
PER SHARE OPERATING
PERFORMANCE:
Net asset value, beginning of
period ...................... $14.39 $14.81 $13.19 $12.21
-------- --------- -------- --------
Net investment income (loss) . 0.05 0.24 0.34 0.29
Net realized and unrealized
gain (loss) ................. 7.90 (0.38) 2.99 1.03
-------- --------- -------- --------
Total from investment
operations .................. 7.95 (0.14) 3.33 1.32
-------- --------- -------- --------
Less dividends and
distributions from:
Net investment income ...... (0.03) (0.28) (0.32) (0.33)
Net realized gain ........... (1.65) -- (1.39) --
Paid-in-capital ............. -- -- -- (0.01)
-------- --------- -------- --------
Total dividends and
distributions ............... (1.68) (0.28) (1.71) (0.34)
-------- --------- -------- --------
Net asset value, end of
period ...................... $20.66 $14.39 $14.81 $13.19
======== ========= ======== ========
TOTAL INVESTMENT RETURN+ .... 56.26% (0.90)% 25.39% 10.84%
RATIOS TO AVERAGE NET ASSETS:
Expenses...................... 1.58% 1.70% 1.66% 1.78%
Net investment income (loss) . 0.29% 1.67% 2.23% 2.15%
SUPPLEMENTAL DATA:
Net assets, end of period, in
millions..................... $ 227 $ 89 $ 100 $ 90
Portfolio turnover rate ..... 264% 234% 196% 133%
Average commission rate paid -- -- -- --
</TABLE>
- ------------
* Prior to July 28, 1997, the Fund issued one class of shares. All shares
of the Fund held prior to that date, other than shares which were
purchased prior to April 30, 1984 (and with respect to such shares,
certain shares acquired through reinvestment of dividends and capital
gains distributions (collectively the "Old Shares")), have been
designated Class B shares. The Old Shares have been designated Class D
shares.
++ 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.
SEE NOTES TO FINANCIAL STATEMENTS
59
<PAGE>
DEAN WITTER AMERICAN VALUE FUND
FINANCIAL HIGHLIGHTS, continued
<TABLE>
<CAPTION>
FOR THE PERIOD
JULY 28, 1997*
THROUGH
DECEMBER 31,
1997++
- ------------------------------------------ ------------------
<S> <C>
CLASS A SHARES
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period ..... $ 31.87
------------------
Net investment income ..................... 0.05
Net realized and unrealized gain .......... 2.32
------------------
Total from investment operations .......... 2.37
------------------
Less distributions from net realized gain (4.65)
------------------
Net asset value, end of period ............ $ 29.59
==================
TOTAL INVESTMENT RETURN+ .................. 7.70 %(1)
RATIOS TO AVERAGE NET ASSETS:
Expenses .................................. 0.92 %(2)
Net investment income ..................... 0.38 %(2)
SUPPLEMENTAL DATA:
Net assets, end of period, in thousands .. $15,844
Portfolio turnover rate ................... 275 %
Average commission rate paid .............. $0.0563
CLASS C SHARES
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period ..... $ 31.87
------------------
Net investment loss ....................... (0.05)
Net realized and unrealized gain .......... 2.32
------------------
Total from investment operations .......... 2.27
------------------
Less distributions from net realized gain . (4.65)
------------------
Net asset value, end of period ............ $ 29.49
==================
TOTAL INVESTMENT RETURN+ .................. 7.39 %(1)
RATIOS TO AVERAGE NET ASSETS:
Expenses .................................. 1.66 %(2)
Net investment loss ....................... (0.36)%(2)
SUPPLEMENTAL DATA:
Net assets, end of period, in thousands .. $12,204
Portfolio turnover rate ................... 275 %
Average commission rate paid .............. $0.0563
</TABLE>
- ------------
* The date shares were first issued.
++ 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.
SEE NOTES TO FINANCIAL STATEMENTS
60
<PAGE>
DEAN WITTER AMERICAN VALUE FUND
FINANCIAL HIGHLIGHTS, continued
<TABLE>
<CAPTION>
FOR THE PERIOD
JULY 28, 1997*
THROUGH
DECEMBER 31,
1997++
- ------------------------------------------ ------------------
<S> <C>
CLASS D SHARES
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period ..... $ 31.87
------------------
Net investment income ..................... 0.07
Net realized and unrealized gain .......... 2.34
------------------
Total from investment operations .......... 2.41
------------------
Less distributions from net realized gain (4.65)
------------------
Net asset value, end of period ............ $ 29.63
==================
TOTAL INVESTMENT RETURN+ .................. 7.83%(1)
RATIOS TO AVERAGE NET ASSETS:
Expenses .................................. 0.64%(2)
Net investment income ..................... 0.50%(2)
SUPPLEMENTAL DATA:
Net assets, end of period, in thousands .. $49,772
Portfolio turnover rate ................... 275%
Average commission rate paid .............. $0.0563
</TABLE>
- ------------
* The date shares were first issued. Shareholders who held shares of the
Fund prior to July 28, 1997 (the date the Fund converted to a multiple
class share structure) should refer to the Financial Highlights of Class
B to obtain the historical per share data and ratio information of their
shares.
++ 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.
SEE NOTES TO FINANCIAL STATEMENTS
61
<PAGE>
DEAN WITTER AMERICAN VALUE FUND
REPORT OF INDEPENDENT ACCOUNTANTS
TO THE SHAREHOLDERS AND TRUSTEES
OF DEAN WITTER AMERICAN VALUE 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 Dean Witter
American Value Fund (the "Fund") at December 31, 1997, the results of its
operations for the year then ended, the changes in its net assets for each of
the two years in the period then ended and the financial highlights for each
of the periods presented, in conformity with generally accepted accounting
principles. These financial statements and financial highlights (hereafter
referred to as "financial statements") are the responsibility of the Fund's
management; our responsibility is to express an opinion on these financial
statements based on our audits. We conducted our audits of these financial
statements in accordance with generally accepted auditing standards which
require that we plan and perform the audit to obtain reasonable assurance
about whether the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts
and disclosures in the financial statements, assessing the accounting
principles used and significant estimates made by management, and evaluating
the overall financial statement presentation. We believe that our audits,
which included confirmation of securities at December 31, 1997 by
correspondence with the custodian and brokers and the application of
alternative auditing procedures where confirmations from brokers were not
received, provide a reasonable basis for the opinion expressed above.
PRICE WATERHOUSE LLP
1177 Avenue of the Americas
New York, New York 10036
February 6, 1998
62
<PAGE>
DEAN WITTER AMERICAN VALUE FUND
FEDERAL TAX NOTICE (unaudited)
1997 FEDERAL TAX NOTICE
For the year ended December 31, 1997, the Fund paid to shareholders the
following per share amounts from long-term capital gains. These distributions
are taxable as 28% rate gains or 20% rate gains, as indicated below:
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C CLASS D
--------- --------- --------- ---------
PORTION OF LONG-TERM CAPITAL GAINS TAXABLE AS:
<S> <C> <C> <C> <C>
28% rate gain ................................ $0.48 $0.72 $0.48 $0.48
20% rate gain ................................ 0.46 0.46 0.46 0.46
--------- --------- --------- ---------
Total.......................................... $0.94 $1.18 $0.94 $0.94
========= ========= ========= =========
</TABLE>
For the year ended December 31, 1997, 5.08% of the income dividends qualified
for the dividends received deduction available to corporations.
63
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION
JANUARY 29, 1998 DEAN WITTER
CAPITAL APPRECIATION
FUND
- -------------------------------------------------------------------------------
Dean Witter Capital Appreciation Fund (the "Fund") is an open-end,
diversified management investment company whose investment objective is
long-term capital appreciation. The Fund seeks to achieve its objective by
investing primarily in the common stocks of U.S. companies that, in the opinion
of the Investment Manager, offer the potential for either superior earnings
growth and/or appear to be undervalued. Current income is not an objective of
the Fund. (See "Investment Objective and Policies.")
A Prospectus for the Fund dated January 29, 1998, which provides the basic
information you should know before investing in the Fund, may be obtained
without charge from the Fund at its address or telephone numbers listed below or
from the Fund's Distributor, Dean Witter Distributors Inc., or from Dean Witter
Reynolds Inc. at any of its branch offices. This Statement of Additional
Information is not a Prospectus. It contains information in addition to and more
detailed than that set forth in the Prospectus. It is intended to provide
additional information regarding the activities and operations of the Fund, and
should be read in conjunction with the Prospectus.
Dean Witter
Capital Appreciation Fund
Two World Trade Center
New York, New York 10048
(212) 392-2550 or
(800) 869-NEWS (toll-free)
<PAGE>
TABLE OF CONTENTS
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
The Fund and its Management............................................................ 3
Trustees and Officers.................................................................. 6
Investment Practices and Policies...................................................... 13
Investment Restrictions................................................................ 26
Portfolio Transactions and Brokerage................................................... 27
The Distributor........................................................................ 29
Determination of Net Asset Value....................................................... 33
Purchase of Fund Shares................................................................ 34
Shareholder Services................................................................... 36
Redemptions and Repurchases............................................................ 41
Dividends, Distributions and Taxes..................................................... 42
Performance Information................................................................ 44
Description of Shares.................................................................. 45
Custodian and Transfer Agent........................................................... 46
Independent Accountants................................................................ 46
Reports to Shareholders................................................................ 46
Legal Counsel.......................................................................... 47
Experts................................................................................ 47
Registration Statement................................................................. 47
Financial Statements -- November 30, 1997.............................................. 48
Report of Independent Accountants...................................................... 66
</TABLE>
2
<PAGE>
THE FUND AND ITS MANAGEMENT
- --------------------------------------------------------------------------------
THE FUND
The Fund is a trust of the type commonly known as a "Massachusetts business
trust" and was organized under the laws of the Commonwealth of Massachusetts on
July 31, 1995.
THE INVESTMENT MANAGER
Dean Witter InterCapital Inc. (the "Investment Manager" or "InterCapital"),
a Delaware corporation, whose address is Two World Trade Center, New York, New
York 10048, is the Fund's Investment Manager. InterCapital is a wholly-owned
subsidiary of Morgan Stanley, Dean Witter, Discover & Co. ("MSDWD"), a Delaware
corporation. In an internal reorganization which took place in January, 1993,
InterCapital assumed the advisory, administrative and management activities
previously performed by the InterCapital Division of Dean Witter Reynolds Inc.
("DWR"), a broker-dealer affiliate of InterCapital. (As hereinafter used in this
Statement of Additional Information, the terms "InterCapital" and "Investment
Manager" refer to DWR's InterCapital Division prior to the internal
reorganization and to Dean Witter InterCapital Inc. thereafter.) The daily
management of the Fund and research relating to the Fund's portfolio are
conducted by or under the direction of officers of the Fund and of the
Investment Manager, subject to review by the Fund's Trustees. Information as to
these Trustees and officers is contained under the caption "Trustees and
Officers."
InterCapital is the investment manager or investment adviser of the
following management investment companies: Active Assets Money Trust, Active
Assets Tax-Free Trust, Active Assets California Tax-Free Trust, Active Assets
Government Securities Trust, InterCapital Income Securities Inc., InterCapital
Insured Municipal Bond Trust, InterCapital Insured Municipal Trust, InterCapital
Insured Municipal Income Trust, InterCapital Insured Municipal Securities,
InterCapital California Insured Municipal Income Trust, InterCapital Insured
California Municipal Securities, InterCapital Quality Municipal Investment
Trust, InterCapital Quality Municipal Income Trust, InterCapital Quality
Municipal Securities, InterCapital California Quality Municipal Securities,
InterCapital New York Quality Municipal Securities, High Income Advantage Trust,
High Income Advantage Trust II, High Income Advantage Trust III, Dean Witter
Government Income Trust, Dean Witter High Yield Securities Inc., Dean Witter
Tax-Free Daily Income Trust, Dean Witter Tax-Exempt Securities Trust, Dean
Witter Dividend Growth Securities Inc., Dean Witter Natural Resource Development
Securities Inc., Dean Witter American Value Fund, Dean Witter Developing Growth
Securities Trust, Dean Witter U.S. Government Money Market Trust, Dean Witter
Variable Investment Series, Dean Witter World Wide Investment Trust, Dean Witter
Select Municipal Reinvestment Fund, Dean Witter U.S. Government Securities
Trust, Dean Witter World Wide Income Trust, Dean Witter California Tax-Free
Income Fund, Dean Witter New York Tax-Free Income Fund, Dean Witter Convertible
Securities Trust, Dean Witter Federal Securities Trust, Dean Witter Value-Added
Market Series, Dean Witter Utilities Fund, Dean Witter California Tax-Free Daily
Income Trust, Dean Witter Strategist Fund, Dean Witter Intermediate Income
Securites, Dean Witter Capital Growth Securities, Dean Witter Precious Metals
and Minerals Trust, Dean Witter New York Municipal Money Market Trust, Dean
Witter European Growth Fund Inc., Dean Witter Global Short-Term Income Fund
Inc., Dean Witter Pacific Growth Fund Inc., Dean Witter Multi-State Municipal
Series Trust, Dean Witter Short-Term U.S. Treasury Trust, Dean Witter
Diversified Income Trust, Dean Witter Health Sciences Trust, Dean Witter
Retirement Series, Dean Witter Global Dividend Growth Securities, Dean Witter
Limited Term Municipal Trust, Dean Witter Short-Term Bond Fund, Dean Witter
Global Utilities Fund, Dean Witter International SmallCap Fund, Dean Witter
Mid-Cap Growth Fund, Dean Witter Select Dimensions Investment Series, Dean
Witter Global Asset Allocation Fund, Dean Witter Balanced Growth Fund, Dean
Witter Balanced Income Fund, Dean Witter Hawaii Municipal Trust, Dean Witter
Japan Fund, Dean Witter Income Builder Fund, Dean Witter Special Value Fund,
Dean Witter Financial Services Trust, Dean Witter Market Leader, Dean Witter S&P
500 Index Fund, Dean Witter Fund of Funds, Morgan Stanley Dean Witter
Competitive Edge Fund -- "Best Ideas" Portfolio, Dean Witter Capital
Appreciation Fund, Dean Witter Information Fund, Dean Witter Intermediate Term
U.S. Treasury Trust, Municipal Income Trust, Municipal Income Trust II,
Municipal Income Trust III, Municipal Income Opportunities Trust, Municipal
Income Opportunities Trust II, Municipal Income Opportunities Trust III,
Municipal Premium Income Trust
3
<PAGE>
and Prime Income Trust. The foregoing investment companies, together with the
Fund, are collectively referred to as the Dean Witter Funds.
In addition, Dean Witter Services Company Inc. ("DWSC"), a wholly-owned
subsidiary of InterCapital, serves as manager for the following investment
companies for which TCW Funds Management, Inc. is the investment adviser: TCW/DW
Core Equity Trust, TCW/DW Mid-Cap Equity Trust, TCW/DW Latin American Growth
Fund, TCW/DW Income and Growth Fund, TCW/DW Small Cap Growth Fund, TCW/DW
Balanced Fund, TCW/DW North American Government Income Trust, TCW/DW Total
Return Trust, TCW/DW Global Telecom Trust, TCW/DW Strategic Income Trust, TCW/DW
Emerging Markets Opportunities Trust, TCW/DW Term Trust 2000, TCW/DW Term Trust
2002 and TCW/DW Term Trust 2003 (the "TCW/DW Funds"). InterCapital also serves
as: (i) administrator of The BlackRock Strategic Term Trust Inc., a closed-end
investment company; (ii) sub-administrator of MassMutual Participation Investors
and Templeton Global Governments Income Trust, closed-end investment companies;
and (iii) investment advisor of Offshore Dividend Growth Fund and Offshore Money
Market Fund, mutual funds established under the laws of the Cayman Islands and
available only to investors who are participants in DWR's International Active
Assets Account program and are neither citizens nor residents of the United
States.
Pursuant to an Investment Management Agreement (the "Management Agreement")
with the Investment Manager, the Fund has retained the Investment Manager to
manage the investment of the Fund's assets, including the placing of orders for
the purchase and sale of portfolio securities. The Investment Manager obtains
and evaluates such information and advice relating to the economy, securities
markets and specific securities as it considers necessary or useful to
continuously manage the assets of the Fund in a manner consistent with its
investment objective.
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, such office space, facilities, equipment, clerical help and bookkeeping
and certain legal services as the Fund may reasonably require in the conduct of
its business, including the preparation of prospectuses, statements of
additional information, proxy statements and reports required to be filed with
federal and state securities commissions (except insofar as the participation or
assistance of independent accountants and attorneys is, in the opinion of the
Investment Manager, necessary or desirable). In addition, the Investment Manager
pays the salaries of all personnel, including officers of the Fund, who are
employees of the Investment Manager. The Investment Manager also bears the cost
of telephone service, heat, light, power and other utilities provided to the
Fund. The Investment Manager has retained DWSC to perform its administrative
services under the Agreement.
Expenses not expressly assumed by the Investment Manager under the
Management Agreement or by the distributor of the Fund's shares, Dean Witter
Distributors Inc. ("Distributors" or the "Distributor") (see "The Distributor")
will be paid by the Fund. These expenses will be allocated among the four
classes of shares of the Fund (each, a "Class") pro rata 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 (the "12b-1 fee" ) (see "The Distributor"); charges and expenses
of any registrar; custodian, stock transfer and dividend disbursing agent;
brokerage commissions; taxes; engraving and printing of 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 and Statements of Additional Information of the Fund and
supplements thereto to the Fund's shareholders; all expenses of shareholders'
and trustees' meetings and of preparing, printing and mailing 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 (not including
compensation or expenses of attorneys who are employees of the Investment
Manager) and independent accountants; membership dues of industry
4
<PAGE>
associations; interest on the Fund's borrowings; postage; insurance premiums on
property or personnel (including officers and trustees) of the Fund which inure
to its benefit; extraordinary expenses including, but not limited to, legal
claims and liabilities and litigation costs and any indemnification relating
thereto (depending upon the nature of the legal claim, liability or lawsuit) and
all other costs of the Fund's operations properly payable by the Fund. 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 obligation
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 in no way
restricts the Investment Manager from acting as investment manager or adviser to
others.
As full compensation for the services and facilities furnished to the Fund
and expenses of the Fund assumed by the Investment Manager, the Fund pays the
Investment Manager monthly compensation calculated daily by applying a
percentage rate of 0.75% to the portion of daily net assets not exceeding $500
million and 0.725% to the portion of daily net assets exceeding $500 million.
The management fee is allocated among the Class pro rata based on the net assets
of the Fund attributable to each Class. For the period October 27, 1995
(commencement of operations) through November 30, 1995 and the fiscal years
ended November 30, 1996 and 1997, the Fund accrued $62,692, $1,607,148 and
$2,578,896, respectively, to the Investment Manager pursuant to the Agreement.
The Investment Manager paid the organizational expenses of the Fund, in the
amount of $179,000, incurred prior to the offering of the Fund's shares. The
Fund has reimbursed the Investment Manager for such expenses in accordance with
the terms of the Underwriting Agreement between the Fund and Distributors. The
Fund is deferring and amortizing the organizational expenses on the straight
line method over a period not to exceed five years from the date of commencement
of the Fund's operations.
The Management Agreement was initially approved by the Board of Trustees on
February 21, 1997 and by the shareholders of the Fund at a Special Meeting of
Shareholders held on May 21, 1997. The Agreement is substantially identical to a
prior investment management agreement which was initially approved by the Board
of Trustees on August 24, 1995 and by InterCapital, as the then sole shareholder
of the Fund on August 24, 1995 and amended by the Board of Trustees on April 24,
1997 to reduce the compensation received by the Investment Manager under the
Agreement for assets exceeding $500 million, so that the compensation under the
Agreement is calculated daily by applying the following annual rates to the
Fund's net assets determined as of the close of each business day: 0.75% of the
portion of daily net assets not exceeding $500 million; and 0.725% of the
portion of daily net assets exceeding $500 million. The Agreement took effect on
May 31, 1997 upon consummation of the merger of Dean Witter, Discover & Co. with
Morgan Stanley Group Inc. The Agreement may be terminated at any time, without
penalty, on thirty days' notice by the Board of Trustees of the Fund, by the
holder of a majority, as defined in the Investment Company Act of 1940 (the
"Act"), of the outstanding shares of the Fund, or by the Investment Manager. The
Agreement will automatically terminate in the event of its assignment (as
defined in the Act).
Under its terms, the Agreement will continue in effect until April 30, 1999,
and will remain in effect from year to year thereafter, provided continuance of
the Agreement is approved at least annually by the vote of the holders of a
majority of the outstanding shares of the Fund, as defined in the Act, or by the
Trustees of the Fund; provided that in either event such continuance is approved
annually by the vote of a majority of the Trustees of the Fund who are not
parties to the Agreement or "interested persons" (as defined in the Act) of any
such party (the "Independent Trustees"), which vote must be cast in person at a
meeting called for the purpose of voting on such approval.
5
<PAGE>
The following owned 5% or more of the outstanding shares of Class A on
November 30, 1997:
Dean Witter Reynolds Custodian for Robert M. Portnoff, IRA Rollover, 285
Francisco Street, Henderson, NV 89014-6027 -- 20.1%; William H. Thrower, Rev.
Trust, William H. Thrower Trustee, P.O. Box 426, Debary, FL 32713-0426 -- 15.7%;
Fry/Mac Inc., Profit Sharing Plan & Trust, 164 Marco Way, South San Francisco,
94080-6916 -- 11.6%; Larry L. Cole, Rev. Trust, Larry L. Cole Trustee, 1322
Sweetbriar Rd., Orlando, FL 32806-7064 -- 9.0%.
The following owned 5% or more of the outstanding shares of Class C on
November 30, 1997:
O. H. Davison, Jr. & Philip Burton Trs. ULWT Marie V. Brunschwiler, 55
Iroquois Trail, Pontola Valley, CA 94028-76076 -- 7.4%; James J. Monks MD FACS
PA Employees Pension Plan; 26 Bayberry Drive, Saddle River, NJ 07458-2610 --
5.4%.
The following owned 5% or more of the outstanding shares of Class D on
November 30, 1997:
Hare & Co., c/o The Bank of New York, P.O. Box 11203, New York, NY
10286-1203 -- 88.6%; Dean Witter Reynolds Custodian for Baruch S. Blumberg, IRA
Rollover, 7701 Burholme Avenue Philadelphia, PA 19111-2412 -- 5.2%.
The Fund has acknowledged that the name "Dean Witter" is a property right of
DWR. The Fund has agreed that DWR or its parent company may use, or at any time
permit others to use, the name "Dean Witter." The Fund has also agreed that in
the event the Agreement is terminated, or if the affiliation between
InterCapital and its parent company is terminated, the Fund will eliminate the
name "Dean Witter" from its name if DWR or its parent company shall so request.
TRUSTEES AND OFFICERS
- --------------------------------------------------------------------------------
The Trustees and Executive Officers of the Fund, their principal business
occupations during the last five years and their affiliations, if any, with
InterCapital, and with the 84 Dean Witter Funds and the 14 TCW/DW Funds are
shown below:
<TABLE>
<CAPTION>
NAME, AGE, POSITION WITH FUND AND ADDRESS PRINCIPAL OCCUPATIONS DURING LAST FIVE YEARS
- ------------------------------------------------------ ----------------------------------------------------------
<S> <C>
Michael Bozic (57) ................................... Chairman and Chief Executive Officer of Levitz Furniture
Trustee Corporation (since November, 1995); Director or Trustee of
c/o Levitz Furniture Corporation the Dean Witter Funds; formerly President and Chief
6111 Broken Sound Parkway, N.W. Executive Officer of Hills Department Stores (May,
Boca Raton, Florida 1991-July, 1995); formerly variously Chairman, Chief
Executive Officer, President and Chief Operating Officer
(1987-1991) of the Sears Merchandise Group of Sears,
Roebuck and Co.; Director of Eaglemark Financial Services,
Inc., the United Negro College Fund and Weirton Steel
Corporation.
Charles A. Fiumefreddo* (64) ......................... Chairman, Chief Executive Officer and Director of
Chairman of the Board, InterCapital, Distributors and DWSC; Executive Vice
President and Chief Executive President and Director of DWR; Chairman, Director or
Officer and Trustee Trustee, President and Chief Executive Officer of the Dean
Two World Trade Center Witter Funds; Chairman, Chief Executive Officer and
New York, New York Trustee of the TCW/DW Funds; Chairman and Director of Dean
Witter Trust Company FSB ("DWT"); Director and/or officer
of various MSDWD subsidiaries; formerly Executive Vice
President and Director of Dean Witter Discover & Co.
(until February, 1993).
</TABLE>
6
<PAGE>
<TABLE>
<CAPTION>
NAME, AGE, POSITION WITH FUND AND ADDRESS PRINCIPAL OCCUPATIONS DURING LAST FIVE YEARS
- ------------------------------------------------------ ----------------------------------------------------------
<S> <C>
Edwin J. Garn (65) ................................... Director or Trustee of the Dean Witter Funds; formerly
Trustee United States Senator (R-Utah) (1974-1992) and Chairman,
c/o Huntsman Corporation Senate Banking Committee (1980-1986); formerly Mayor of
500 Huntsman Way Salt Lake City, Utah (1972-1974); formerly Astronaut,
Salt Lake City, Utah Space Shuttle Discovery (April 12-19, 1985); Vice
Chairman, Huntsman Corporation (since January, 1993);
Director of Franklin Covey (time management systems), John
Alden Financial Corp (health insurance), United Space
Alliance (joint venture between Lockheed Martin and the
Boeing Company) and Nuskin Asia Pacific (multilevel
marketing); Member of the board of various civic and
charitable organizations.
John R. Haire (72) ................................... Chairman of the Audit Committee and Chairman of the
Trustee Committee of the Independent Directors or Trustees and
Two World Trade Center Director or Trustee of the Dean Witter Funds; Chairman of
New York, New York the Audit Committee and Chairman of the Committee of the
Independent Trustees and Trustee of the TCW/DW Funds;
formerly President, Council for Aid to Education
(1978-1989) and Chairman and Chief Executive Officer of
Anchor Corporation, an Investment Adviser (1964-1978).
Wayne E. Hedien (63) ................................. Retired, Director or Trustee of the Dean Witter Funds;
Trustee Director of The PMI Group, Inc. (private mortgage
c/o Gordon Altman Butowsky insurance); Trustee and Vice Chairman of The Field Museum
Weitzen Shalov & Wein of Natural History; formerly associated with the Allstate
Counsel to the Independent Trustees Companies (1966-1994), most recently as Chairman of The
114 West 47th Street Allstate Corporation (March, 1993-December, 1994) and
New York, New York Chairman and Chief Executive Officer of its wholly-owned
subsidiary, Allstate Insurance Company (July,
1989-December, 1994); director of various other business
and charitable organizations.
Dr. Manuel H. Johnson (48) ........................... Senior Partner, Johnson Smick International, Inc., a
Trustee consulting firm; Co-Chairman and a founder of the Group of
c/o Johnson Smick International, Inc. Seven Council (G7C), an international economic commission;
1133 Connecticut Avenue, N.W. Director or Trustee of the Dean Witter Funds; Trustee of
Washington, DC the TCW/DW Funds; Director of NASDAQ (since June, 1995);
Chairman and Trustee of the Financial Accounting
Foundation (oversight organization for the Financial
Accounting Standards Board); Director of Greenwich Capital
Markets Inc. (broker-dealer); formerly Vice Chairman of
the Board of Governors of the Federal Reserve System
(1986-1990) and Assistant Secretary of the U.S. Treasury
(1982-1986).
</TABLE>
7
<PAGE>
<TABLE>
<CAPTION>
NAME, AGE, POSITION WITH FUND AND ADDRESS PRINCIPAL OCCUPATIONS DURING LAST FIVE YEARS
- ------------------------------------------------------ ----------------------------------------------------------
<S> <C>
Michael E. Nugent (61) ............................... General Partner, Triumph Capital, L.P., a private
Trustee investment partnership; Director or Trustee of the Dean
c/o Triumph Capital, L.P. Witter Funds; Trustee of the TCW/DW Funds; formerly Vice
237 Park Avenue President, Bankers Trust Company and BT Capital
New York, New York Corporation (1984-1988); Director of various business
organizations.
Philip J. Purcell* (54) .............................. Chairman of the Board of Directors and Chief Executive
Trustee Officer of MSDWD, DWR and Novus Credit Services Inc.;
1585 Broadway Director of InterCapital, DWSC and Distributors; Director
New York, New York or Trustee of the Dean Witter Funds; Director and/or
officer of various MSDWD subsidiaries.
John L. Schroeder (67) ............................... Retired; Director or Trustee of the Dean Witter Funds;
Trustee Trustee of the TCW/DW Funds; Director of Citizens
c/o Gordon Altman Butowsky Utilities Company; formerly Executive Vice President and
Weitzen Shalov & Wein Chief Investment Officer of the
Counsel to the Independent Trustees Home Insurance Company (August, 1991-
114 West 47th Street September, 1995).
New York, New York
Barry Fink (43) ...................................... Senior Vice President (since March, 1997) and Secretary
Vice President, Secretary and General Counsel (since February, 1997) of InterCapital
and General Counsel and DWSC; Senior Vice President (since March, 1997) and
Two World Trade Center Assistant Secretary and Assistant General Counsel (since
New York, New York February, 1997) of Distributors; Assistant Secretary of
DWR (since August, 1996); Vice President, Secretary and
General Counsel of the Dean Witter Funds and the TCW/DW
Funds (since February, 1997); previously First Vice
President (June, 1993-February, 1997), Vice President
(until June, 1993) and Assistant Secretary and Assistant
General Counsel of InterCapital and DWSC and Assistant
Secretary of the Dean Witter Funds and the TCW/DW Funds.
Ronald J. Worobel (54) ............................... Senior Vice President, Vice President of various Dean
Vice President Witter Funds.
Two World Trade Center
New York, New York
Thomas F. Caloia (51) ................................ First Vice President and Assistant Treasurer of
Treasurer InterCapital and DWSC; Treasurer of the Dean Witter Funds
Two World Trade Center and the TCW/DW Funds.
New York, New York
</TABLE>
- ------------
* Denotes Trustees who are "interested persons" of the Fund, as defined in the
Act.
8
<PAGE>
In addition, Robert M. Scanlan, President and Chief Operating Officer of
InterCapital and DWSC, Executive Vice President of Distributors and DWT and a
Director of DWT, Mitchell M. Merin, President and Chief Strategic Officer of
InterCapital and DWSC, Executive Vice President of Distributors and DWT and
Director of DWT, Executive Vice President and Director of DWR and Director of
SPS Transaction Services, Inc. and various other MSDWD subsidiaries, Robert S.
Giambrone, Senior Vice President of InterCapital, DWSC, Distributors and DWT and
a Director of DWT, Joseph J. McAlinden, Executive Vice President and Chief
Investment Officer of InterCapital and a Director of DWT, and Kenton J.
Hinchliffe and Jayne Stevlingson, Senior Vice Presidents of InterCapital, are
Vice Presidents of the Fund. In addition, Marilyn K. Cranney, First Vice
President and Assistant General Counsel of InterCapital and DWSC, Lou Anne D.
McInnis, Carsten Otto and Ruth Rossi, Vice Presidents and Assistant General
Counsels of InterCapital and DWSC, and Frank Bruttomesso and Todd Lebo, Staff
Attorneys with InterCapital, are Assistant Secretaries of the Fund.
THE BOARD OF TRUSTEES, THE INDEPENDENT TRUSTEES, AND THE COMMITTEES
The Board of Trustees currently consists of nine (9) trustees. These same
individuals also serve as directors or trustees for all of the Dean Witter
Funds, and are referred to in this section as Trustees. As of the date of this
Statement of Additional Information, there are a total of 84 Dean Witter Funds,
comprised of 128 portfolios. As of December 31, 1997, the Dean Witter Funds had
total net assets of approximately $93.7 billion and more than six million
shareholders.
Seven Trustees (77% of the total number) have no affiliation or business
connection with InterCapital or any of its affiliated persons and do not own any
stock or other securities issued by InterCapital's parent company, MSDWD. These
are the "disinterested" or "independent" Trustees. The other two Trustees (the
"management Trustees") are affiliated with InterCapital. Four of the seven
independent Trustees are also Independent Trustees of the TCW/DW Funds.
Law and regulation establish both general guidelines and specific duties for
the Independent Trustees. The Dean Witter Funds seek as Independent Trustees
individuals of distinction and experience in business and finance, government
service or academia; these are people whose advice and counsel are in demand by
others and for whom there is often competition. To accept a position on the
Funds' Boards, such individuals may reject other attractive assignments because
the Funds make substantial demands on their time. Indeed, by serving on the
Funds' Boards, certain Trustees who would otherwise be qualified and in demand
to serve on bank boards would be prohibited by law from doing so.
All of the Independent Trustees serve as members of the Audit Committee and
the Committee of the Independent Trustees. Three of them also serve as members
of the Derivatives Committee. During the calendar year ended December 31, 1997,
the three Committees held a combined total of seventeen meetings. The Committees
hold some meetings at InterCapital's offices and some outside InterCapital.
Management Trustees or officers do not attend these meetings unless they are
invited for purposes of furnishing information or making a report.
The Committee of the Independent Trustees is charged with recommending to
the full Board approval of management, advisory and administration contracts,
Rule 12b-1 plans and distribution and underwriting agreements; continually
reviewing Fund performance; checking on the pricing of portfolio securities,
brokerage commissions, transfer agent costs and performance, and trading among
Funds in the same complex; and approving fidelity bond and related insurance
coverage and allocations, as well as other matters that arise from time to time.
The Independent Trustees are required to select and nominate individuals to fill
any Independent Trustee vacancy on the Board of any Fund that has a Rule 12b-1
plan of distribution. Most of the Dean Witter Funds have such a plan.
The Audit Committee is charged with recommending to the full Board the
engagement or discharge of the Fund's independent accountants; directing
investigations into matters within the scope of the independent accountants'
duties, including the power to retain outside specialists; reviewing with the
independent accountants the audit plan and results of the auditing engagement;
approving professional services provided by the independent accountants and
other accounting firms prior to the performance of such services; reviewing the
independence of the independent accountants; considering the range of
9
<PAGE>
audit and non-audit fees; reviewing the adequacy of the Fund's system of
internal controls; and preparing and submitting Committee meeting minutes to the
full Board.
Finally, the Board of each Fund has formed a Derivatives Committee to
establish parameters for and oversee the activities of the Fund with respect to
derivative investments, if any, made by the Fund.
DUTIES OF CHAIRMAN OF COMMITTEE OF THE INDEPENDENT TRUSTEES AND AUDIT COMMITTEE
The Chairman of the Committee of the Independent Trustees and the Audit
Committee maintains an office at the Funds' headquarters in New York. He is
responsible for keeping abreast of regulatory and industry developments and the
Funds' operations and management. He screens and/or prepares written materials
and identifies critical issues for the Independent Trustees to consider,
develops agendas for Committee meetings, determines the type and amount of
information that the Committees will need to form a judgment on various issues,
and arranges to have that information furnished to Committee members. He also
arranges for the services of independent experts and consults with them in
advance of meetings to help refine reports and to focus on critical issues.
Members of the Committees believe that the person who serves as Chairman of both
Committees and guides their efforts is pivotal to the effective functioning of
the Committees.
The Chairman of the Committees also maintains continuous contact with the
Funds' management, with independent counsel to the Independent Trustees and with
the Funds' independent auditors. He arranges for a series of special meetings
involving the annual review of investment advisory, management and other
operating contracts of the Funds and, on behalf of the Committees, conducts
negotiations with the Investment Manager and other service providers. In effect,
the Chairman of the Committees serves as a combination of chief executive and
support staff of the Independent Trustees.
The Chairman of the Committee of the Independent Trustees and the Audit
Committee is not employed by any other organization and devotes his time
primarily to the services he performs as Committee Chairman and Independent
Trustee of the Dean Witter Funds and as an Independent Trustee and as Chairman
of the Committee of the Independent Trustees and the Audit Committee of the TCW/
DW Funds. The current Committee Chairman has had more than 35 years experience
as a senior executive in the investment company industry.
ADVANTAGES OF HAVING SAME INDIVIDUALS AS INDEPENDENT TRUSTEES FOR ALL DEAN
WITTER FUNDS
The Independent Trustees and the Funds' management believe that having the
same Independent Trustees for each of the Dean Witter Funds avoids the
duplication of effort that would arise from having different groups of
individuals serving as Independent Trustees for each of the Funds or even of
sub-groups of Funds. They believe that having the same individuals serve as
Independent Trustees of all the Funds tends to increase their knowledge and
expertise regarding matters which affect the Fund complex generally and enhances
their ability to negotiate on behalf of each Fund with the Fund's service
providers. This arrangement also precludes the possibility of separate groups of
Independent Trustees arriving at conflicting decisions regarding operations and
management of the Funds and avoids the cost and confusion that would likely
ensue. Finally, having the same Independent Trustees serve on all Fund Boards
enhances the ability of each Fund to obtain, at modest cost to each separate
Fund, the services of Independent Trustees, and a Chairman of their Committees,
of the caliber, experience and business acumen of the individuals who serve as
Independent Trustees of the Dean Witter Funds.
COMPENSATION OF INDEPENDENT TRUSTEES
The Fund pays each Independent Trustee an annual fee of $800 plus a per
meeting fee of $50 for meetings of the Board of Trustees or committees of the
Board of Trustees attended by the Trustee (the Fund pays the Chairman of the
Audit Committee an annual fee of $750 and pays the Chairman of the Committee of
the Independent Trustees an additional annual fee of $1,200). If a Board meeting
and a Committee meeting, or more than one Committee meeting, take place on a
single day, the Trustees are paid a single meeting fee by the Fund. The Fund
also reimburses such Trustees for travel and other out-
10
<PAGE>
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.
The following table illustrates the compensation paid to the Fund's
Independent Trustees by the Fund for the fiscal year ended November 30, 1997.
FUND COMPENSATION
<TABLE>
<CAPTION>
AGGREGATE
COMPENSATION
NAME OF INDEPENDENT TRUSTEE FROM THE FUND
- -------------------------------------------------------------- ---------------
<S> <C>
Michael Bozic................................................. $1,650
Edwin J. Garn................................................. 1,850
John R. Haire................................................. 3,800
Wayne E. Hedien............................................... 482
Dr. Manuel H. Johnson......................................... 1,800
Michael E. Nugent............................................. 1,850
John L. Schroeder............................................. 1,850
</TABLE>
The following table illustrates the compensation paid to the Fund's
Independent Trustees for the calendar year ended December 31, 1997 for services
to the 84 Dean Witter Funds and, in the case of Messrs. Haire, Johnson, Nugent
and Schroeder, the 14 TCW/DW Funds that were in operation at December 31, 1997.
With respect to Messrs. Haire, Johnson, Nugent and Schroeder, the TCW/DW Funds
are included solely because of a limited exchange privilege between those Funds
and five Dean Witter Money Market Funds. Mr. Hedien's term as Director or
Trustee of each Dean Witter Fund commenced on September 1, 1997.
CASH COMPENSATION FROM DEAN WITTER FUNDS AND TCW/DW FUNDS
<TABLE>
<CAPTION>
FOR SERVICE AS FOR SERVICE
CHAIRMAN OF AS
COMMITTEES OF CHAIRMAN OF TOTAL CASH
FOR SERVICE FOR SERVICE INDEPENDENT COMMITTEES OF COMPENSATION
AS DIRECTOR OR AS DIRECTORS/ INDEPENDENT FOR SERVICES
TRUSTEE AND TRUSTEE AND TRUSTEES AND TRUSTEES AND TO
COMMITTEE COMMITTEE AUDIT AUDIT 84 DEAN WITTER
MEMBER MEMBER COMMITTEES OF COMMITTEES OF FUNDS AND
NAME OF OF 84 DEAN WITTER OF 14 TCW/DW 84 DEAN WITTER 14 TCW/DW 14 TCW/DW
INDEPENDENT TRUSTEE FUNDS FUNDS FUNDS FUNDS FUNDS
- --------------------------- ----------------- ------------ -------------- ------------- --------------
<S> <C> <C> <C> <C> <C>
Michael Bozic.............. $ 133,602 -- -- -- $ 133,602
Edwin J. Garn.............. 149,702 -- -- -- 149,702
John R. Haire.............. 149,702 $73,725 $ 157,463 $ 25,350 406,240
Wayne E. Hedien............ 39,010 -- -- -- 39,010
Dr. Manuel H. Johnson...... 145,702 71,125 -- -- 216,827
Michael E. Nugent.......... 149,702 73,725 -- -- 223,427
John L. Schroeder.......... 149,702 73,725 -- -- 223,427
</TABLE>
As of the date of this Statement of Additional Information, 57 of the Dean
Witter Funds, not including the Fund, have adopted a retirement program under
which an Independent Trustee who retires after serving for at least five years
(or such lesser period as may be determined by the Board) as an Independent
Director or Trustee of any Dean Witter Fund that has adopted the retirement
program (each such Fund referred to as an "Adopting Fund" and each such Trustee
referred to as an "Eligible Trustee") is entitled to retirement payments upon
reaching the eligible retirement age (normally, after attaining age 72). Annual
payments are based upon length of service. Currently, upon retirement, each
Eligible Trustee is entitled to receive from the Adopting Fund, commencing as of
his or her retirement date and continuing for the remainder of his or her life,
an annual retirement benefit (the "Regular Benefit") equal
11
<PAGE>
to 25.0% of his or her Eligible Compensation plus 0.4166666% of such Eligible
Compensation for each full month of service as an Independent Director or
Trustee of any Adopting Fund in excess of five years up to a maximum of 50.0%
after ten years of service. The foregoing percentages may be changed by the
Board.(1) "Eligible Compensation" is one-fifth of the total compensation earned
by such Eligible Trustee for service to the Adopting Fund in the five year
period prior to the date of the Eligible Trustee's retirement. Benefits under
the retirement program are not secured or funded by the Adopting Funds.
The following table illustrates the retirement benefits accrued to the
Fund's Independent Trustees by the 57 Dean Witter Funds (not including the Fund)
for the year ended December 31, 1997, and the estimated retirement benefits for
the Fund's Independent Trustees, to commence upon their retirement, from the 57
Dean Witter Funds as of December 31, 1997.
RETIREMENT BENEFITS FROM ALL DEAN WITTER FUNDS
<TABLE>
<CAPTION>
ESTIMATED
ESTIMATED RETIREMENT ANNUAL
CREDITED BENEFITS BENEFITS
YEARS ESTIMATED ACCRUED AS UPON
OF SERVICE PERCENTAGE EXPENSES RETIREMENT
AT OF BY ALL FROM ALL
RETIREMENT ELIGIBLE ADOPTING ADOPTING
NAME OF INDEPENDENT TRUSTEE (MAXIMUM 10) COMPENSATION FUNDS FUNDS(2)
- ---------------------------------------------------------------- ------------ -------------- ------------
<S> <C> <C> <C> <C>
Michael Bozic....................................... 10 50.0% $ 20,499 $ 47,025
Edwin J. Garn....................................... 10 50.0 30,878 47,025
John R. Haire....................................... 10 50.0 (19,823)(3) 127,897
Wayne E. Hedien..................................... 9 42.5 0 39,971
Dr. Manuel H. Johnson............................... 10 50.0 12,832 47,025
Michael E. Nugent................................... 10 50.0 22,546 47,025
John L. Schroeder................................... 8 41.7 39,350 39,504
</TABLE>
- ------------------------
(1) An Eligible Trustee may elect alternate payments of his or her retirement
benefits based upon the combined life expectancy of such Eligible Trustee
and his or her spouse on the date of such Eligible Trustee's retirement. The
amount estimated to be payable under this method, through the remainder of
the later of the lives of such Eligible Trustee and spouse, will be the
actuarial equivalent of the Regular Benefit. In addition, the Eligible
Trustee may elect that the surviving spouse's periodic payment of benefits
will be equal to either 50% or 100% of the previous periodic amount, an
election that, respectively, increases or decreases the previous periodic
amount so that the resulting payments will be the actuarial equivalent of
the Regular Benefit.
(2) Based on current levels of compensation. Amount of annual benefits also
varies depending on the Trustee's elections described in Footnote (1) above.
(3) This number reflects the effect of the extension of Mr. Haire's term as
Director or Trustee until June 1, 1998.
As of the date of this Statement of Additional Information, the aggregate
number of shares of beneficial interest of the Fund owned by the Fund's officers
and Trustees as a group was less than 1 percent of the Fund's shares of
beneficial interest outstanding.
12
<PAGE>
INVESTMENT PRACTICES AND POLICIES
- --------------------------------------------------------------------------------
Foreign Securities. As stated in the Prospectus, the Fund may invest in
securities issued by foreign issuers. Investors should carefully consider the
risks of investing in securities of foreign issuers and securities denominated
in non-U.S. currencies. Fluctuations in the relative rates of exchange between
the currencies of different nations will affect the value of the Fund's
investments. Changes in foreign currency exchange rates relative to the U.S.
dollar will affect the U.S. dollar value of the Fund's assets denominated in
that currency and thereby impact upon the Fund's total return on such assets.
Foreign currency exchange rates are determined by forces of supply and
demand on the foreign exchange markets. These forces are themselves affected by
the international balance of payments and other economic and financial
conditions, government intervention, speculation and other factors. Moreover,
foreign currency exchange rates may be affected by the regulatory control of the
exchanges on which currencies trade.
Investments in foreign securities will also occasion risks relating to
political and economic developments abroad, including the possibility of
expropriations or confiscatory taxation, limitations on the use or transfer of
Fund assets and any effects of foreign social, economic or political
instability. Foreign companies are not subject to the regulatory requirements of
U.S. companies and, as such, there may be less publicly available information
about such companies. Moreover, foreign companies are not subject to uniform
accounting, auditing and financial reporting standards and requirements
comparable to those applicable to U.S. companies.
Securities of foreign issuers may be less liquid than comparable securities
of U.S. issuers and, as such, their price changes may be more volatile.
Furthermore, foreign exchanges and broker-dealers are generally subject to less
government and exchange scrutiny and regulation then their American
counterparts. Brokerage commissions, dealer concessions and other transaction
costs may be higher on foreign markets than in the U.S. In addition, differences
in clearance and settlement procedures on foreign markets may occasion delays in
settlements of Fund trades effected in such markets. Inability to dispose of
portfolio securities due to settlement delays could result in losses to the Fund
due to subsequent declines in value of such securities and the inability of the
Fund to make intended security purchases due to settlement problems could result
in a failure of the Fund to make potentially advantageous investments.
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
("collateral") at a specified price and at a fixed time in the future, usually
not more than seven days from the date of purchase. The collateral will be
maintained in a segregated account and will be marked-to-market daily to
determine that the value of the collateral, as specified in the agreement, does
not decrease below the purchase price plus accrued interest. If such decrease
occurs, additional collateral will be requested and, when received, added to the
account to maintain full collateralization. The Fund will accrue interest from
the institution until the time when the repurchase is to occur. Although such
date is deemed by the Fund to be the maturity date of a repurchase agreement,
the maturities of securities subject to repurchase agreements are not subject to
any limits.
While repurchase agreements involve certain risks not associated with direct
investments in debt securities, the Fund follows procedures designed to minimize
such risks. These procedures include effecting repurchase transactions only with
large, well-capitalized and well-established financial institutions whose
financial condition will be continually monitored by the Investment Manager
subject to procedures established by the Board of Trustees of the Fund. In
addition, as described above, the value of the collateral underlying the
repurchase agreement will be at least equal to the repurchase price,
13
<PAGE>
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 10% of its net assets.
The Fund's investments in repurchase agreements may at times be substantial
when, in the view of the Investment Manager, liquidity, tax or other
considerations warrant.
Lending of Portfolio Securities. Consistent with applicable regulatory
requirements, the Fund may lend its portfolio securities to brokers, dealers and
other financial institutions, provided that such loans are callable at any time
by the Fund (subject to notice provisions described below), and are at all times
secured by cash or cash equivalents, which are maintained in a segregated
account pursuant to applicable regulations and that are equal to at least the
market value, determined daily, of the loaned securities. The advantage of such
loans is that the Fund continues to receive the income on the loaned securities
while at the same time earning interest on the cash amounts deposited as
collateral, which will be invested in short-term obligations. The Fund will not
lend its portfolio securities if such loans are not permitted by the laws or
regulations of any state in which its shares are qualified for sale and will not
lend more than 25% of the value of its total assets. A loan may be terminated by
the borrower on one business day's notice, or by the Fund on four business days'
notice. If the borrower fails to deliver the loaned securities within four days
after receipt of notice, the Fund could use the collateral to replace the
securities while holding the borrower liable for any excess of replacement cost
over collateral. As with any extensions of credit, there are risks of delay in
recovery and in some cases even loss of rights in the collateral should the
borrower of the securities fail financially. However, these loans of portfolio
securities will only be made to firms deemed by the Fund's management to be
creditworthy and when the income which can be earned from such loans justifies
the attendant risks. Upon termination of the loan, the borrower is required to
return the securities to the Fund. Any gain or loss in the market price during
the loan period would inure to the Fund. The creditworthiness of firms to which
the Fund lends its portfolio securities will be monitored on an ongoing basis by
the Investment Manager pursuant to procedures adopted and reviewed, on an
ongoing basis, by the Board of Trustees of the Fund.
When voting or consent rights which accompany loaned securities pass to the
borrower, the Fund will follow the policy of calling the loaned securities, to
be delivered within one day after notice, to permit the exercise of such rights
if the matters involved would have a material effect on the Fund's investment in
such loaned securities. The Fund will pay reasonable finder's, administrative
and custodial fees in connection with a loan of its securities. During the
fiscal year ended November 30, 1997, the Fund did not loan any of its portfolio
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 such transactions are negotiated, the price is fixed at the time of the
commitment, but delivery and payment can take place a month or more after the
date of commitment. While 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, the
value may be more or less than the purchase or sale price. The Fund will also
establish a segregated account with its custodian bank in which it will
continually maintain cash or cash equivalents or other liquid portfolio
securities equal in value to commitments to purchase securities on a
when-issued, delayed delivery or forward commitment basis. Subject to the
foregoing
14
<PAGE>
restrictions, the Fund may purchase securities on such basis without limit. The
Investment Manager and the Board of Trustees do not believe that the Fund's net
asset value will be adversely affected by the purchase of securities on such
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, leveraged buyout or debt restructuring. The commitment
for the purchase of any such security will not be recognized in the portfolio of
the Fund until the Investment Manager determines that issuance of the security
is probable. At such time, the Fund will record the transaction and, in
determining its net asset value, will reflect the value of the security daily.
At such time, the Fund will also establish a segregated account with its
custodian bank in which it will maintain cash or cash equivalents or other
liquid portfolio securities equal in value to recognized commitments for such
securities. Once a segregated account has been established, if the anticipated
event does not occur and the securities are not issued, the Fund will have lost
an investment opportunity. The value of the Fund's commitments to purchase the
securities of any one issuer, together with the value of all securities of such
issuer owned by the Fund, may not exceed 5% of the value of the Fund's total
assets at the time the initial commitment to purchase such securities is made
(see "Investment Restrictions"). Subject to the foregoing restrictions, the Fund
may purchase securities on such basis without limit. An increase in the
percentage of the Fund's assets committed to the purchase of securities on a
"when, as and if issued" basis may increase the volatility of its net asset
value. The Investment Manager and the Trustees do not believe that the net asset
value of the Fund will be adversely affected by its purchase of securities on
such basis. 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 the
sale.
Rights and Warrants. The Fund may invest up to 5% of the value of its net
assets in warrants, including not more than 2% in warrants not listed on either
the New York or American Stock Exchange. 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 and
stock rights attached to other securities without reference to the foregoing
limitations.
Private Placements. The Fund may invest up to 5% of its total assets in
securities which are subject to restrictions on resale because they have not
been registered under the Securities Act of 1933, as amended (the "Securities
Act"), or which are otherwise not readily marketable. (Securities eligible for
resale pursuant to Rule 144A of the Securities Act, and determined to be liquid
pursuant to the procedures discussed in the following paragraph, are not subject
to the foregoing restriction.) Limitations on the resale of such securities may
have an adverse effect on their marketability, and may prevent the Fund from
disposing of them promptly at reasonable prices. The Fund may have to bear the
expense of registering such securities for resale and the risk of substantial
delays in effecting such registration.
The Securities and Exchange Commission ("SEC") has adopted Rule 144A under
the Securities Act, which permits the Fund to sell restricted securities to
qualified institutional buyers without limitation. The Investment Manager,
pursuant to procedures adopted by the Trustees of the Fund, will make a
determination as to the liquidity of each restricted security purchased by the
Fund. The procedures require that the following factors be taken into account in
making a liquidity determination: (1) the frequency of trades and price quotes
for the security; (2) the number of dealers and other potential purchasers who
have issued quotes on the security; (3) any dealer undertakings to make a market
in the security; and (4) the nature of the security and the nature of the
marketplace trades (the time needed to dispose of the security, the method of
soliciting offers, and the mechanics of transfer). If a restricted security is
determined to be "liquid," such security will not be included within the
category "illiquid securities," which under the SEC's current policies may not
exceed 10% of the Fund's net assets, and will not be subject to the 5%
limitation set out in the preceding paragraph.
15
<PAGE>
OPTIONS AND FUTURES TRANSACTIONS
The Fund may write covered call options against securities held in its
portfolio and covered put options on eligible portfolio securities and stock
indexes and purchase options of the same series to effect closing transactions,
and may hedge against potential changes in the market value of investments (or
anticipated investments) and facilitate the reallocation of the Fund's assets
into and out of equities and fixed-income securities by purchasing put and call
options on portfolio (or eligible portfolio) securities and engaging in
transactions involving futures contracts and options on such contracts. The Fund
may also hedge against potential changes in the market value of the currencies
in which its investments (or anticipated investments) are denominated by
purchasing put and call options on currencies and engage in transactions
involving currency futures contracts and options on such contracts.
Call and put options on U.S. Treasury notes, bonds and bills and equity
securities are listed on Exchanges and are written in over-the-counter
transactions ("OTC options"). Listed options are issued by the Options Clearing
Corporation ("OCC") and other clearing entities including foreign exchanges.
Ownership of a listed call option gives the Fund the right to buy from the OCC
the underlying security covered by the option at the stated exercise price (the
price per unit of the underlying security) by filing an exercise notice prior to
the expiration date of the option. The writer (seller) of the option would then
have the obligation to sell to the OCC the underlying security at that exercise
price prior to the expiration date of the option, regardless of its then current
market price. Ownership of a listed put option would give the Fund the right to
sell the underlying security to the OCC at the stated exercise price. Upon
notice of exercise of the put option, the writer of the put would have the
obligation to purchase the underlying security from the OCC at the exercise
price.
Options on Treasury Bonds and Notes. Because trading in options written on
Treasury bonds and notes tends to center on the most recently auctioned issues,
the exchanges on which such securities trade will not continue indefinitely to
introduce options with new expirations to replace expiring options on particular
issues. Instead, the expirations introduced at the commencement of options
trading on a particular issue will be allowed to run their course, with the
possible addition of a limited number of new expirations as the original ones
expire. Options trading on each issue of bonds or notes will thus be phased out
as new options are listed on more recent issues, and options representing a full
range of expirations will not ordinarily be available for every issue on which
options are traded.
Options on Treasury Bills. Because a deliverable Treasury bill changes from
week to week, writers of Treasury bill calls cannot provide in advance for their
potential exercise settlement obligations by acquiring and holding the
underlying security. However, if the Fund holds a long position in Treasury
bills with a principal amount of the securities deliverable upon exercise of the
option, the position may be hedged from a risk standpoint by the writing of a
call option. For so long as the call option is outstanding, the Fund will hold
the Treasury bills in a segregated account with its Custodian, so that they will
be treated as being covered.
Options on Foreign Currencies. The Fund may purchase and write options on
foreign currencies for purposes similar to those involved with investing in
forward foreign currency exchange contracts. For example, in order to protect
against declines in the dollar value of portfolio securities which are
denominated in a foreign currency, the Fund may purchase put options on an
amount of such foreign currency equivalent to the current value of the portfolio
securities involved. As a result, the Fund would be enabled to sell the foreign
currency for a fixed amount of U.S. dollars, thereby "locking in" the dollar
value of the portfolio securities (less the amount of the premiums paid for the
options). Conversely, the Fund may purchase call options on foreign currencies
in which securities it anticipates purchasing are denominated to secure a set
U.S. dollar price for such securities and protect against a decline in the value
of the U.S. dollar against such foreign currency. The Fund may also purchase
call and put options to close out written option positions.
The Fund may also write call options on foreign currency to protect against
potential declines in its portfolio securities which are denominated in foreign
currencies. If the U.S. dollar value of the portfolio securities falls as a
result of a decline in the exchange rate between the foreign currency in which a
16
<PAGE>
security is denominated and the U.S. dollar, then a loss to the Fund occasioned
by such value decline would be ameliorated by receipt of the premium on the
option sold. At the same time, however, the Fund gives up the benefit of any
rise in value of the relevant portfolio securities above the exercise price of
the option and, in fact, only receives a benefit from the writing of the option
to the extent that the value of the portfolio securities falls below the price
of the premium received. The Fund may also write options to close out long call
option positions.
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. Although the Fund will not purchase or
write such options unless and until, in the opinion of the management of the
Fund, the market for them has developed sufficiently to ensure that the risks in
connection with such options are not greater than the risks in connection with
the underlying currency, there can be no assurance that a liquid secondary
market will exist for a particular option at any specific time. In addition,
options on foreign currencies are affected by all of those factors which
influence foreign exchange rates and investments generally.
The value of a foreign currency option depends upon the value of the
underlying currency relative to the U.S. dollar. As a result, the price of the
option position may vary with changes in the value of either or both currencies
and have no relationship to the investment merits of a foreign security,
including foreign securities held in a "hedged" investment portfolio. Because
foreign currency transactions occurring in the interbank market involve
substantially larger amounts than those that may be involved in the use of
foreign currency options, investors may be disadvantaged by having to deal in an
odd lot market (generally consisting of transactions of less than $1 million)
for the underlying foreign currencies at prices that are less favorable than for
round lots.
There is no systematic reporting of last sale information for foreign
currencies or any regulatory requirement that quotations available through
dealers or other market sources be firm or revised on a timely basis. Quotation
information available is generally representative of very large transactions in
the interbank market and thus may not reflect relatively smaller transactions
(i.e., less than $1 million) where rates may be less favorable. The interbank
market in foreign currencies is a global, around-the-clock market. To the extent
that the U.S. options markets are closed while the markets for the underlying
currencies remain open, significant price and rate movements may take place in
the underlying markets that are not reflected in the options market.
OTC Options. Exchange-listed options are issued by the OCC which assures
that all transactions in such options are properly executed. OTC options are
purchased from or sold (written) to dealers or financial institutions which have
entered into direct agreements with the 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. If the transacting dealer fails to make or take delivery of the
securities underlying an option it has written, in accordance with the terms of
that option, the Fund would lose the premium paid for the option as well as any
anticipated benefit of the transaction. The Fund will engage in OTC option
transactions only with primary U.S. Government securities dealers recognized by
the Federal Reserve Bank of New York.
Covered Call Writing. The Fund is permitted to write covered call options
on portfolio securities and the U.S. dollar and foreign currencies, without
limit, in order to aid in achieving its investment objective. Generally, a call
option is "covered" if the Fund owns, or has the right to acquire, without
additional cash consideration (or for additional cash consideration held for the
Fund by its Custodian in a segregated account) the underlying security
(currency) subject to the option except that in the case of call options on U.S.
Treasury Bills, the Fund might own U.S. Treasury Bills of a different series
from those underlying the call option, but with a principal amount and value
corresponding to the exercise price and a maturity date no later than that of
the securities (currency) deliverable under the call option. A call option is
also covered if the Fund holds a call on the same security (currency) as the
underlying security (currency) of the written option, where the exercise price
of the call used for coverage is equal to or less than the exercise price of the
call written or greater than the exercise price of the call written if the mark
to
17
<PAGE>
market difference is maintained by the Fund in cash, U.S. Government securities
or other liquid portfolio securities which the Fund holds in a segregated
account maintained with its Custodian.
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 achieve a greater total return than would be
realized from holding the underlying securities (currency) alone. Moreover, the
income received from the premium will offset a portion of the potential loss
incurred by the Fund if the securities (currency) underlying the option are
ultimately sold (exchanged) by the Fund at a loss. The premium received will
fluctuate with varying economic market conditions. If the market value of the
portfolio securities (or the currencies in which they are denominated) upon
which call options have been written increases, the Fund may receive less total
return from the portion of its portfolio upon which calls have been written than
it would have had such calls not been written.
As regards listed options and certain OTC options, during the option period,
the Fund may be required, at any time, to deliver the underlying security
(currency) against payment of the exercise price on any calls it has written
(exercise of certain listed and OTC options may be limited to specific
expiration dates). This obligation is terminated upon the expiration of the
option period or at such earlier time when the writer effects a closing purchase
transaction. A closing purchase transaction is accomplished by purchasing an
option of the same series as the option previously written. However, once the
Fund has been assigned an exercise notice, the Fund will be unable to effect a
closing purchase transaction.
Closing purchase transactions are ordinarily effected to realize a profit on
an outstanding call option to prevent an underlying security (currency) from
being called, to permit the sale of an underlying security (or the exchange of
the underlying currency) or to enable the Fund to write another call option on
the underlying security (currency) with either a different exercise price or
expiration date or both. Also, effecting a closing purchase transaction will
permit the cash or proceeds from the concurrent sale of any securities subject
to the option to be used for other investments by the Fund. The Fund may realize
a net gain or loss from a closing purchase transaction depending upon whether
the amount of the premium received on the call option is more or less than the
cost of effecting the closing purchase transaction. Any loss incurred in a
closing purchase transaction may be wholly or partially offset by unrealized
appreciation in the market value of the underlying security (currency).
Conversely, a gain resulting from a closing purchase transaction could be offset
in whole or in part or exceeded by a decline in the market value of the
underlying security (currency).
If a call option expires unexercised, the Fund realizes a gain in the amount
of the premium on the option less the commission paid. Such a gain, however, may
be offset by depreciation in the market value of the underlying security
(currency) during the option period. If a call option is exercised, the Fund
realizes a gain or loss from the sale of the underlying security (currency)
equal to the difference between the purchase price of the underlying security
(currency) and the proceeds of the sale of the security (currency) plus the
premium received for on the option less the commission paid.
Options written by a Fund normally have expiration dates of from up to nine
months (equity securities) to eighteen months (fixed-income securities) from the
date written. The exercise price of a call option may be below, equal to or
above the current market value of the underlying security (currency) at the time
the option is written. See "Risks of Options Transactions," below.
Covered Put Writing. As a writer of a covered put option, the Fund incurs
an obligation to buy the security underlying the option from the purchaser of
the put, at the option's exercise price at any time during the option period, at
the purchaser's election (certain listed and OTC put options written by the Fund
will be exercisable by the purchaser only on a specific date). A put is
"covered" if, at all times, the Fund maintains, in a segregated account
maintained on its behalf at the Fund's Custodian, cash, U.S. Government
securities or other liquid portfolio securities in an amount equal to at least
the exercise price of the option, at all times during the option period.
Similarly, a short put position could be covered by the Fund by its purchase of
a put option on the same security as the underlying security of the written
option, where the exercise price of the purchased option is equal to or more
than the exercise price of the put written or less than the exercise price of
the put written if the mark-to-market difference is maintained by
18
<PAGE>
the Fund in cash, U.S. Government securities or other liquid portfolio
securities which the Fund holds in a segregated account maintained at its
Custodian. In writing puts, the Fund assumes the risk of loss should the market
value of the underlying security decline below the exercise price of the option
(any loss being decreased by the receipt of the premium on the option written).
In the case of listed options, during the option period, the Fund may be
required, at any time, to make payment of the exercise price against delivery of
the underlying security. The operation of, and limitations on, covered put
options in other respects are substantially identical to those of call options.
The Fund will write put options for two purposes: (1) to receive the income
derived from the premiums paid by purchasers; and (2) when the Investment
Manager wishes to purchase the security underlying the option at a price lower
than its current market price, in which case it will write the covered put at an
exercise price reflecting the lower purchase price sought. The potential gain on
a covered put option is limited to the premium received on the option (less the
commissions paid on the transaction) while the potential loss equals the
difference between the exercise price of the option and the current market price
of the underlying securities when the put is exercised, offset by the premium
received (less the commissions paid on the transaction).
Purchasing Call and Put Options. The Fund may purchase listed and OTC call
and put options in amounts equalling up to 5% of its total assets. The Fund may
purchase call options in order to close out a covered call position (see
"Covered Call Writing" above) or purchase call options on securities they intend
to purchase. The Fund may also purchase a call option on foreign currency to
hedge against an adverse exchange rate move of the currency in which the
security it anticipates purchasing is denominated vis-a-vis the currency in
which the exercise price is denominated. The purchase of the call option to
effect a closing transaction or a call written over-the-counter may be a listed
or an OTC option. In either case, the call purchased is likely to be on the same
securities (currencies) and have the same terms as the written option. If
purchased over-the-counter, the option would generally be acquired from the
dealer or financial institution which purchased the call written by the Fund.
The Fund may purchase put options on securities (currency) which it holds
(or has the right to acquire) in its portfolio only to protect itself against a
decline in the value of the security (currency). If the value of the underlying
security (currency) were to fall below the exercise price of the put purchased
in an amount greater than the premium paid for the option, the Fund would incur
no additional loss. The Fund may also purchase put options to close out written
put positions in a manner similar to call options closing purchase transactions.
In addition, the Fund may sell a put option which it has previously purchased
prior to the sale of the securities (currency) underlying such option. Such a
sale would result in a net gain or loss depending on whether the amount received
on the sale is more or less than the premium and other transaction costs paid on
the put option which is sold. Any such gain or loss could be offset in whole or
in part by a change in the market value of the underlying security (currency).
If a put option purchased by the Fund expired without being sold or exercised,
the premium would be lost.
Risks of Options Transactions. During the option period, the covered call
writer has, in return for the premium on the option, given up the opportunity
for capital appreciation above the exercise price should the market price of the
underlying security (or the currency in which it is denominated) increase, but
has retained the risk of loss should the price of the underlying security
(currency) decline. The covered put writer also retains the risk of loss should
the market value of the underlying security (currency) decline below the
exercise price of the option less the premium received on the sale of the
option. In both cases, the writer has no control over the time when it may be
required to fulfill its obligation as a writer of the option. Once an option
writer has received an exercise notice, it cannot effect a closing purchase
transaction in order to terminate its obligation under the option and must
deliver or receive the underlying securities (currency) at the exercise price.
Prior to exercise or expiration, an option position can only be terminated
by entering into a closing purchase or sale transaction. If a covered call
option writer is unable to effect a closing purchase transaction or to purchase
an offsetting over-the-counter option, it cannot sell the underlying security
until the option expires or the option is exercised. Accordingly, a covered call
option writer may not be
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able to sell (exchange) an underlying security (currency) at a time when it
might otherwise be advantageous to do so. A covered put option writer who is
unable to effect a closing purchase transaction or to purchase an offsetting
over-the-counter option would continue to bear the risk of decline in the market
price of the underlying security (currency) until the option expires or is
exercised. In addition, a covered put writer would be unable to utilize the
amount held in cash or U.S. Government securities or other liquid portfolio
securities as security for the put option for other investment purposes until
the exercise or expiration of the option.
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, as such options will generally only be closed out by entering into
a closing purchase transaction with the purchasing dealer. However, the Fund may
be able to purchase an offsetting option which does not close out its position
as a writer but constitutes an asset of equal value to the obligation under the
option written. If the Fund is not able to either enter into a closing purchase
transaction or purchase an offsetting position, it will be required to maintain
the securities subject to the call, or the collateral underlying the put, even
though it might not be advantageous to do so, until a closing transaction can be
entered into (or the option is exercised or expires).
Among the possible reasons for the absence of a liquid secondary market on
an Exchange are: (i) insufficient trading interest in certain options; (ii)
restrictions on transactions imposed by an Exchange; (iii) trading halts,
suspensions or other restrictions imposed with respect to particular classes or
series of options or underlying securities; (iv) interruption of the normal
operations on an Exchange; (v) inadequacy of the facilities of an Exchange or
the Options Clearing Corporation ("OCC") to handle current trading volume; or
(vi) a decision by one or more Exchanges to discontinue the trading of options
(or a particular class or series of options), in which event the secondary
market on that Exchange (or in that class or series of options) would cease to
exist, although outstanding options on that Exchange that had been issued by the
OCC as a result of trades on that Exchange would generally continue to be
exercisable in accordance with their terms.
Exchanges limit the amount by which the price of a futures contract may move
on any day. If the price moves equal the daily limit on successive days, then it
may prove impossible to liquidate a futures position until the daily limit moves
have ceased. In the event of adverse price movements, the Fund would continue to
be required to make daily cash payments of variation margin on open futures
positions. In such situations, if the Fund has insufficient cash, it may have to
sell portfolio securities to meet daily variation margin requirements at a time
when it may be disadvantageous to do so. In addition, the Fund may be required
to take or make delivery of the instruments underlying interest rate futures
contracts it holds at a time when it is disadvantageous to do so. The inability
to close out options and futures positions could also have an adverse impact on
the Fund's ability to effectively hedge its portfolio.
In the event of the bankruptcy of a broker through which the Fund engages in
transactions in options, futures or options thereon, the Fund could experience
delays and/or losses in liquidating open positions purchased or sold through the
broker and/or incur a loss of all or part of its margin deposits with the
broker. Similarly, in the event of the bankruptcy of the writer of an OTC option
purchased by the Fund, the Fund could experience a loss of all or part of the
value of the option. Transactions are entered into by the Fund only with brokers
or financial institutions deemed creditworthy by the Investment Manager.
Each of the Exchanges has established limitations governing the maximum
number of call or put options on the same underlying security or futures
contract (whether or not covered) which may be written by a single investor,
whether acting alone or in concert with others (regardless of whether such
options are written on the same or different Exchanges or are held or written on
one or more accounts or through one or more brokers). An Exchange may order the
liquidation of positions found to be in violation of these limits and it may
impose other sanctions or restrictions. These position limits may restrict the
number of listed options which the Fund may write.
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While the futures contracts and options transactions to be engaged in by the
Fund for the purpose of hedging the Fund's portfolio securities are not
speculative in nature, there are risks inherent in the use of such instruments.
One such risk which may arise in employing futures contracts to protect against
the price volatility of portfolio securities is that the prices of securities
and indexes subject to futures contracts (and thereby the futures contract
prices) may correlate imperfectly with the behavior of the cash prices of the
Fund's portfolio securities. Another such risk is that prices of interest rate
futures contracts may not move in tandem with the changes in prevailing interest
rates against which the Fund seeks a hedge. A correlation may also be distorted
by the fact that the futures market is dominated by short-term traders seeking
to profit from the difference between a contract or security price objective and
their cost of borrowed funds. Such distortions are generally minor and would
diminish as the contract approached maturity.
The hours of trading for options may not conform to the hours during which
the underlying securities are traded. To the extent that the option markets
close before the markets for the underlying securities, significant price and
rate movements can take place in the underlying markets that cannot be reflected
in the option markets.
Stock Index Options. Options on stock indexes are similar to options on
stock except that, rather than the right to take or make delivery of stock at a
specified price, an option on a stock index gives the holder the right to
receive, upon exercise of the option, an amount of cash if the closing level of
the stock index upon which the option is based is greater than, in the case of a
call, or less than, in the case of a put, the exercise price of the option. This
amount of cash is equal to such difference between the closing price of the
index and the exercise price of the option expressed in dollars times a
specified multiple (the "multiplier"). The multiplier for an index option
performs a function similar to the unit of trading for a stock option. It
determines the total dollar value per contract of each point in the difference
between the exercise price of an option and the current level of the underlying
index. A multiplier of 100 means that a one-point difference will yield $100.
Options on different indexes may have different multipliers. The writer of the
option is obligated, in return for the premium received, to make delivery of
this amount. Unlike stock options, all settlements are in cash and a gain or
loss depends on price movements in the stock market generally (or in a
particular segment of the market) rather than the price movements in individual
stocks. Currently, options are traded on the S&P 100 Index and the S&P 500 Index
on the Chicago Board Options Exchange, the Major Market Index and the Computer
Technology Index, Oil Index and Institutional Index on the American Stock
Exchange and the NYSE Index and NYSE Beta Index on the New York Stock Exchange,
The Financial News Composite Index on the Pacific Stock Exchange and the Value
Line Index, National O-T-C Index and Utilities Index on the Philadelphia Stock
Exchange, each of which and any similar index on which options are traded in the
future which include stocks that are not limited to any particular industry or
segment of the market is referred to as a "broadly based stock market index."
Options on stock indexes provide the Fund with a means of protecting the Fund
against the risk of market wide price movements. If the Investment Manager
anticipates a market decline, the Fund could purchase a stock index put option.
If the expected market decline materialized, the resulting decrease in the value
of the Fund's portfolio would be offset to the extent of the increase in the
value of the put option. If the Investment Manager anticipates a market rise,
the Fund may purchase a stock index call option to enable the Fund to
participate in such rise until completion of anticipated common stock purchases
by the Fund. Purchases and sales of stock index options also enable the
Investment Manager to more speedily achieve changes in the Fund's equity
positions.
The Fund will write put options on stock indexes only if such positions are
covered by cash, U.S. Government securities or other liquid portfolio securities
equal to the aggregate exercise price of the puts, which cover is held for the
Fund in a segregated account maintained for it by the Fund's Custodian. All call
options on stock indexes written by the Fund will be covered either by a
portfolio of stocks substantially replicating the movement of the index
underlying the call option or by holding a separate call option on the same
stock index with a strike price no higher than the strike price of the call
option sold by the Fund.
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Risks of Options on Indexes. Because exercises of stock index options are
settled in cash, call writers such as the Fund cannot provide in advance for
their potential settlement obligations by acquiring and holding the underlying
securities. A call writer can offset some of the risk of its writing position by
holding a diversified portfolio of stocks similar to those on which the
underlying index is based. However, most investors cannot, as a practical
matter, acquire and hold a portfolio containing exactly the same stocks as the
underlying index, and, as a result, bear a risk that the value of the securities
held will vary from the value of the index. Even if an index call writer could
assemble a stock portfolio that exactly reproduced the composition of the
underlying index, the writer still would not be fully covered from a risk
standpoint because of the "timing risk" inherent in writing index options. When
an index option is exercised, the amount of cash that the holder is entitled to
receive is determined by the difference between the exercise price and the
closing index level on the date when the option is exercised. As with other
kinds of options, the writer will not learn that it has been assigned until the
next business day, at the earliest. The time lag between exercise and notice of
assignment poses no risk for the writer of a covered call on a specific
underlying security, such as a common stock, because there the writer's
obligation is to deliver the underlying security, not to pay its value as of a
fixed time in the past. So long as the writer already owns the underlying
security, it can satisfy its settlement obligations by simply delivering it, and
the risk that its value may have declined since the exercise date is borne by
the exercising holder. In contrast, even if the writer of an index call holds
stocks that exactly match the composition of the underlying index, it will not
be able to satisfy its assignment obligations by delivering those stocks against
payment of the exercise price. Instead, it will be required to pay cash in an
amount based on the closing index value on the exercise date; and by the time it
learns that it has been assigned, the index may have declined, with a
corresponding decrease in the value of its stock portfolio. This "timing risk"
is an inherent limitation on the ability of index call writers to cover their
risk exposure by holding stock positions.
A holder of an index option who exercises it before the closing index value
for that day is available runs the risk that the level of the underlying index
may subsequently change. If such a change causes the exercised option to fall
out-of-the-money, the exercising holder will be required to pay the difference
between the closing index value and the exercise price of the option (times the
applicable multiplier) to the assigned writer.
If dissemination of the current level of an underlying index is interrupted,
or if trading is interrupted in stocks accounting for a substantial portion of
the value of an index, the trading of options on that index will ordinarily be
halted. If the trading of options on an underlying index is halted, an exchange
may impose restrictions prohibiting the exercise of such options.
Futures Contracts. The Fund may purchase and sell interest rate and stock
index futures contracts ("futures contracts") that are traded on U.S. and
foreign commodity exchanges on such underlying securities as U.S. Treasury
bonds, notes and bills ("interest rate" futures), on the U.S. dollar and foreign
currencies, and such indexes as the S&P 500 Index, the Moody's Investment-Grade
Corporate Bond Index and the New York Stock Exchange Composite Index ("index"
futures).
As a futures contract purchaser, the Fund incurs an obligation to take
delivery of a specified amount of the obligation underlying the contract at a
specified time in the future for a specified price. As a seller of a futures
contract, the Fund incurs an obligation to deliver the specified amount of the
underlying obligation at a specified time in return for an agreed upon price.
The Fund will purchase or sell interest rate futures contracts and bond
index futures contracts for the purpose of hedging its fixed-income portfolio
(or anticipated portfolio) securities against changes in prevailing interest
rates. If the Investment Manager anticipates that interest rates may rise and,
concomitantly, the price of fixed-income securities fall, the Fund may sell an
interest rate futures contract or a bond index futures contract. If declining
interest rates are anticipated, the Fund may purchase an interest rate futures
contract to protect against a potential increase in the price of U.S. Government
securities the Fund intends to purchase. Subsequently, appropriate fixed-income
securities may be purchased by the
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<PAGE>
Fund in an orderly fashion; as securities are purchased, corresponding futures
positions would be terminated by offsetting sales of contracts.
The Fund will purchase or sell futures contracts on the U.S. dollar and on
foreign currencies to hedge against an anticipated rise or decline in the value
of the U.S. dollar or foreign currency in which a portfolio security of the Fund
is denominated vis-a-vis another currency.
The Fund will purchase or sell stock index futures contracts for the purpose
of hedging its equity portfolio (or anticipated portfolio) securities against
changes in their prices. If the Investment Manager anticipates that the prices
of stock held by the Fund may fall, the Fund may sell a stock index futures
contract. Conversely, if the Investment Manager wishes to hedge against
anticipated price rises in those stocks which the Fund intends to purchase, the
Fund may purchase stock index futures contracts. In addition, interest rate and
stock index futures contracts will be bought or sold in order to close out a
short or long position in a corresponding futures contract.
Although most interest rate futures contracts call for actual delivery or
acceptance of securities, the contracts usually are closed out before the
settlement date without the making or taking of delivery. Index futures
contracts provide for the delivery of an amount of cash equal to a specified
dollar amount times the difference between the stock index value at the open or
close of the last trading day of the contract and the futures contract price. A
futures contract sale is closed out by effecting a futures contract purchase for
the same aggregate amount of the specific type of equity security and the same
delivery date. If the sale price exceeds the offsetting purchase price, the
seller would be paid the difference and would realize a gain. If the offsetting
purchase price exceeds the sale price, the seller would pay the difference and
would realize a loss. Similarly, a futures contract purchase is closed out by
effecting a futures contract sale for the same aggregate amount of the specific
type of equity security and the same delivery date. If the offsetting sale price
exceeds the purchase price, the purchaser would realize a gain, whereas if the
purchase price exceeds the offsetting sale price, the purchaser would realize a
loss. There is no assurance that the Fund will be able to enter into a closing
transaction.
Interest Rate Futures Contracts. When the Fund enters into an interest rate
futures contract, it is initially required to deposit with the Fund's Custodian,
in a segregated account in the name of the broker performing the transaction, an
"initial margin" of cash or U.S. Government securities or other liquid portfolio
securities equal to approximately 2% of the contract amount. Initial margin
requirements are established by the Exchanges on which futures contracts trade
and may, from time to time, change. In addition, brokers may establish margin
deposit requirements in excess of those required by the Exchanges.
Initial margin in futures transactions is different from margin in
securities transactions in that initial margin does not involve the borrowing of
funds by a brokers' client but is, rather, a good faith deposit on the futures
contract which will be returned to the Fund upon the proper termination of the
futures contract. The margin deposits made are marked to market daily and the
Fund may be required to make subsequent deposits called "variation margin," with
the Fund's Custodian, in the account in the name of the broker, which are
reflective of price fluctuations in the futures contract. Currently, interest
rates futures contracts can be purchased on debt securities such as U.S.
Treasury Bills and Bonds, U.S. Treasury Notes with maturities between 6 1/2 and
10 years, GNMA Certificates and Bank Certificates of Deposit.
Index Futures Contracts. The Fund may invest in index futures contracts. An
index futures contract sale creates an obligation by the Fund, as seller, to
deliver cash at a specified future time. An index futures contract purchase
would create an obligation by the Fund, as purchaser, to take delivery of cash
at a specified future time. Futures contracts on indexes do not require the
physical delivery of securities, but provide for a final cash settlement on the
expiration date which reflects accumulated profits and losses credited or
debited to each party's account.
The Fund is required to maintain margin deposits with brokerage firms
through which it effects index futures contracts in a manner similar to that
described above for interest rate futures contracts. Currently,
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the initial margin requirement is approximately 5% of the contract amount for
index futures. In addition, due to current industry practice, daily variations
in gains and losses on open contracts are required to be reflected in cash in
the form of variation margin payments. The Fund may be required to make
additional margin payments during the term of the contract.
At any time prior to expiration of the futures contract, the Fund may elect
to close the position by taking an opposite position which will operate to
terminate the Fund's position in the futures contract. A final determination of
variation margin is then made, additional cash is required to be paid by or
released to the Fund and the Fund realizes a loss or a gain.
Currently, index futures contracts can be purchased or sold with respect to,
among others, the Standard & Poor's 500 Stock Price Index and the Standard &
Poor's 100 Stock Price Index on the Chicago Mercantile Exchange, the New York
Stock Exchange Composite Index on the New York Futures Exchange, the Major
Market Index on the American Stock Exchange, the Moody's Investment-Grade
Corporate Bond Index on the Chicago Board of Trade and the Value Line Stock
Index on the Kansas City Board of Trade.
Options on Futures Contracts. 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 Fund will purchase and write options on futures contracts for identical
purposes to those set forth above for the purchase of a futures contract
(purchase of a call option or sale of a put option) and the sale of a futures
contract (purchase of a put option or sale of a call option), or to close out a
long or short position in futures contracts. If, for example, the Investment
Manager wished to protect against an increase in interest rates and the
resulting negative impact on the value of a portion of its fixed-income
portfolio, it might write a call option on an interest rate futures contract,
the underlying security of which correlates with the portion of the portfolio
the Investment Manager seeks to hedge. Any premiums received in the writing of
options on futures contracts may, of course, augment the total return of the
Fund and thereby provide a further hedge against losses resulting from price
declines in portions of the Fund's portfolio.
The writer of an option on a futures contract is required to deposit initial
and variation margin pursuant to requirements similar to those applicable to
futures contracts. Premiums received from the writing of an option on a futures
contract are included in initial margin deposits.
Limitations on Futures Contracts and Options on Futures. 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 assets
which may be subject to a hedge position. In addition, in accordance with the
regulations of the Commodity Futures Trading Commission ("CFTC") under which the
Fund is exempted from registration as a commodity pool operator, the Fund may
only enter into futures contracts and options on futures contracts transactions
for purposes of hedging a part or all of its portfolio. If the CFTC changes its
regulations so that the Fund would be permitted to write options on futures
contracts for purposes other than hedging the Fund's investments without CFTC
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<PAGE>
registration, the Fund may engage in such transactions for those purposes.
Except as described above, there are no other limitations on the use of futures
and options thereon by the Fund.
Risks of Transactions In Futures Contracts and Related Options. The Fund
may sell a futures contract to protect against the decline in the value of
securities held by the Fund. However, it is possible that the futures market may
advance and the value of securities held in the portfolio of the Fund may
decline. If this occurred, the Fund would lose money on the futures contract and
also experience a decline in value of its portfolio securities. However, while
this could occur for a very brief period or to a very small degree, over time
the value of a diversified portfolio will tend to move in the same direction as
the futures contracts.
If the Fund purchases a futures contract to hedge against the increase in
value of securities it intends to buy, and the value of such securities
decreases, then the Fund may determine not to invest in the securities as
planned and will realize a loss on the futures contract that is not offset by a
reduction in the price of the securities.
In addition, if 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 for the Fund
by its Custodian. Alternatively, the Fund could cover its long position by
purchasing a put option on the same futures contract with an exercise price as
high or higher than the price of the contract held by the Fund.
If the Fund maintains a short position in a futures contract or has sold a
call option on a futures contract, it will cover this position by holding, in a
segregated account maintained at its Custodian, cash, U.S. Government securities
or other liquid portfolio securities equal in value (when added to any initial
or variation margin on deposit) to the market value of the securities underlying
the futures contract or the exercise price of the option. Such a position may
also be covered by owning the securities underlying the futures contract (in the
case of a stock index futures contract a portfolio of securities substantially
replicating the relevant index), or by holding a call option permitting the Fund
to purchase the same contract at a price no higher than the price at which the
short position was established.
Exchanges may limit the amount by which the price of futures contracts may
move on any day. If the price moves equal the daily limit on successive days,
then it may prove impossible to liquidate a futures position until the daily
limit moves have ceased.
The extent to which the Fund may enter into transactions involving options
and futures contracts may be limited by the Internal Revenue Code's requirements
for qualification as a regulated investment company and the Fund's intention to
qualify as such. See "Dividends, Distributions and Taxes" in the Prospectus and
the Statement of Additional Information.
There may exist an imperfect correlation between the price movements of
futures contracts purchased by the Fund and the movements in the prices of the
securities which are the subject of the hedge. If participants in the futures
market elect to close out their contracts through offsetting transactions rather
than meet margin deposit requirements, distortions in the normal relationship
between the debt securities and futures markets could result. Price distortions
could also result if investors in futures contracts opt to make or take delivery
of underlying securities rather than engage in closing transactions due to the
resultant reduction in the liquidity of the futures market. In addition, due to
the fact that, from the point of view of speculators, the deposit requirements
in the futures markets are less onerous than margin requirements in the cash
market, increased participation by speculators in the futures market could cause
temporary price distortions. Due to the possibility of price distortions in the
futures market and because of the imperfect correlation between movements in the
prices of securities and movements in the prices of futures contracts, a correct
forecast of interest rate trends by the Investment Manager may still not result
in a successful hedging transaction.
There is no assurance that a liquid secondary market will exist for futures
contracts and related options in which the Fund may invest. In the event a
liquid market does not exist, it may not be possible
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<PAGE>
to close out a futures position, and in the event of adverse price movements,
the Fund would continue to be required to make daily cash payments of variation
margin. In addition, limitations imposed by an exchange or board of trade on
which futures contracts are traded may compel or prevent the Fund from closing
out a contract which may result in reduced gain or increased loss to the Fund.
The absence of a liquid market in futures contracts might cause the Fund to make
or take delivery of the underlying securities at a time when it may be
disadvantageous to do so.
Compared to the purchase or sale of futures contracts, the purchase of call
or put options on futures contracts involves less potential risk to the Fund
because the maximum amount at risk is the premium paid for the options (plus
transaction costs). However, there may be circumstances when the purchase of a
call or put option on a futures contract would result in a loss to the Fund
notwithstanding that the purchase or sale of a futures contract would not result
in a loss, as in the instance where there is no movement in the prices of the
futures contract or underlying securities.
The Investment Manager has substantial experience in the use of the
investment techniques described above under the heading "Options and Futures
Transactions," which techniques require skills different from those needed to
select the portfolio securities underlying various options and futures
contracts.
INVESTMENT RESTRICTIONS
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In addition to the investment restrictions enumerated in the Prospectus, the
investment restrictions listed below have been adopted by the Fund as
fundamental policies, except as otherwise indicated. Under the Act, a
fundamental policy may not be changed without the vote of a majority of the
outstanding voting securities of the Fund, as defined in the Act. Such a
majority is defined as the lesser of (a) 67% or more of the shares present at a
meeting of shareholders, if the holders of 50% of the outstanding shares of the
Fund are present or represented by proxy or (b) more than 50% of the outstanding
shares of the Fund.
The Fund may not:
1. 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.
2. 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.
3. Borrow money, except that the Fund, (i) may borrow from a bank for
temporary or emergency purposes and (ii) may engage in reverse repurchase
agreements and dollar rolls, in amounts not exceeding 5% (taken at the lower
of cost or current value) of its total assets (not including the amount
borrowed).
4. Pledge its assets or assign or otherwise encumber them except to
secure borrowings effected within the limitations set forth in restriction
(3). For the purpose of this restriction, collateral arrangements with
respect to the writing of options and collateral arrangements with respect
to initial or variation margin for futures are not deemed to be pledges of
assets.
5. Issue senior securities as defined in the Act, except insofar as the
Fund may be deemed to have issued a senior security by reason of (a)
entering into any repurchase or reverse repurchase agreement; (b) purchasing
any securities on a when-issued or delayed delivery basis; (c) purchasing or
selling futures contracts, forward foreign exchange contracts or options;
(d) borrowing money in accordance with restrictions described above; or (e)
lending portfolio securities.
26
<PAGE>
6. Make loans of money or securities, except: (a) by the purchase of
publicly distributed debt obligations in which the Fund may invest
consistent with its investment objective and policies; (b) by investment in
repurchase agreements; or (c) by lending its portfolio securities.
7. Make short sales of securities.
8. 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 or related options thereon is not considered the purchase
of a security on margin.
9. Engage in the underwriting of securities, except insofar as the Fund
may be deemed an underwriter under the Securities Act of 1933 in disposing
of a portfolio security.
10. Invest for the purpose of exercising control or management of any
other issuer.
11. Purchase securities of other investment companies, except in
connection with a merger, consolidation, reorganization or acquisition of
assets or in accordance with the provisions of Section 12(d) of the Act and
any Rules promulgated thereunder.
12. Purchase or sell commodities or commodities contracts except that
the Fund may purchase or sell futures contracts or options on futures.
If a percentage restriction is adhered to at the time of investment, a later
increase or decrease in percentage resulting from a change in values of
portfolio securities or amount of total or net assets will not be considered a
violation of any of the foregoing restrictions.
Notwithstanding any other investment policy or restriction, 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.
PORTFOLIO TRANSACTIONS AND BROKERAGE
- --------------------------------------------------------------------------------
Subject to the general supervision of the Board of Trustees, the Investment
Manager is responsible for decisions to buy and sell securities for the 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 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.
Options and futures transactions will usually be effected through a broker and a
commission will be charged. On occasion, the Fund may also purchase certain
money market instruments directly from an issuer, in which case no commissions
or discounts are paid. During the fiscal period October 27, 1995 (commencement
of operations) through November 30, 1995 and the fiscal years ended November 30,
1996 and 1997, the Fund paid $70,648, $520,777 and $1,063,917, respectively, in
brokerage commissions.
The Investment Manager currently serves as investment advisors to a number
of clients, including other investment companies, and may in the future act as
investment adviser to others. It is the practice of the Investment Manager 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. In the case of certain initial and secondary public
offerings, the Investment Manager may utilize a pro rata allocation
27
<PAGE>
process based on the size of the Dean Witter Funds involved and the number of
shares available from the public offering.
The policy of the 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 from obtaining a high quality of
brokerage and research services. In seeking to determine the reasonableness of
brokerage commissions paid in any transaction, the Investment Manager relies
upon its experience and knowledge regarding commissions generally charged by
various brokers and on its judgment in evaluating the brokerage and research
services received from the broker effecting the transaction. Such determinations
are necessarily subjective and imprecise, and 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 effects
transactions with those brokers and dealers who the Investment Manager believes
provide the most favorable prices and are capable of providing efficient
executions. If the Investment Manager believes such prices and executions are
obtainable from more than one broker or dealer, it may give consideration to
placing portfolio transactions with those brokers and dealers who also furnish
research and other services to the Fund or the Investment Manager. Such services
may include, but are not limited to, any one or more of the following:
information as to the availability of securities for purchase or sale;
statistical or factual information or opinions pertaining to investment; wire
services; and appraisals or evaluations of portfolio securities. During the
fiscal year ended November 30, 1997, the Fund directed the payment of $891,597
in brokerage commissions in connection with transactions in the aggregate amount
of $351,455,382.
The information and services received by the Investment Manager from brokers
and dealers may be of benefit to them in the management of accounts of some of
their other clients and may not in all cases benefit the Fund directly. While
the receipt of such information and services is useful in varying degrees and
would generally reduce the amount of research or services otherwise performed by
the Investment Manager and thereby reduce their expenses, it is of
indeterminable value and the fees paid to the Investment Manager are not reduced
by any amount that may be attributable to the value of such services.
Pursuant to an order of the Securities and Exchange Commission, the Fund may
effect principal transactions in certain money market instruments with DWR. The
Fund will limit its transactions with DWR to U.S. Government and Government
Agency Securities, Bank Money Instruments (i.e., Certificates of Deposit and
Bankers' Acceptances) and Commercial Paper. Such transactions will be effected
with DWR only when the price available from DWR is better than that available
from other dealers.
Consistent with the policy described above, brokerage transactions in
securities listed on exchanges or admitted to unlisted trading privileges may be
effected through DWR, Morgan Stanley & Co. Incorporated ("MS & Co.") and other
affiliated brokers and dealers. In order for an affiliated broker or dealer to
effect any portfolio transactions for the Fund, the commissions, fees or other
remuneration received by the affiliated broker or dealer must be reasonable and
fair compared to the commissions, fees or other remuneration paid to other
brokers in connection with comparable transactions involving similar securities
being purchased or sold on an exchange during a comparable period of time. This
standard would allow the affiliated broker or dealer to receive no more than the
remuneration which would be expected to be received by an unaffiliated broker in
a commensurate arm's-length transaction.
28
<PAGE>
Furthermore, the Board of Trustees of the Fund, including a majority of the
Trustees who are not "interested" persons of the Fund, as defined in the Act,
have adopted procedures which are reasonably designed to provide that 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
October 27, 1995 through November 30, 1995 and the fiscal years ended November
30, 1996 and 1997, the Fund paid $1,500, $21,460 and $29,900, respectively, in
brokerage commissions to DWR. During the fiscal year ended November 30, 1997,
the brokerage commissions paid to DWR represented approximately 2.81% of the
total brokerage commissions paid by the Fund during the year and were paid on
account of transactions having an aggregate dollar value equal to approximately
4.64% of the aggregate dollar value of all portfolio transactions of the Fund
during the year for which commissions were paid. During the period June 1
through November 30, 1997, the Fund paid a total of $6,250 in brokerage
commissions to MS & Co., which broker-dealer became an affiliate of the
Investment Manager on May 31, 1997 upon consummation of the merger of Dean
Witter, Discover & Co. with Morgan Stanley Group Inc. The brokerage commissions
paid to MS & Co. represented approximately 0.59% of the total brokerage
commissions paid by the Fund for this period and were paid on account of
transactions having an aggregate dollar value equal to approximately 0.73% of
the aggregate dollar value of all portfolio transactions of the Fund during the
period for which commissions were paid.
During the fiscal year ended November 30, 1997, the Fund did not acquire any
securities of the ten brokers or the ten dealers who executed the largest dollar
amounts of principal transactions with the Fund during the period, or securities
of the parents of those broker-dealers.
THE DISTRIBUTOR
- --------------------------------------------------------------------------------
As discussed in the Prospectus, shares of the Fund are distributed by Dean
Witter Distributors Inc. (the "Distributor"). The Distributor has entered into a
dealer agreement with DWR, which through its own sales organization sells shares
of the Fund. In addition, the Distributor may enter into similar agreements with
other selected dealers ("Selected Broker-Dealers"). The Distributor, a Delaware
corporation, is a wholly-owned subsidiary of MSDWD. The Trustees of the Fund,
including a majority of the Trustees who are not, and were not at the time they
voted, interested persons of the Fund, as defined in the Act (the "Independent
Trustees"), approved, at their meeting held on June 30, 1997, the current
Distribution Agreement (the "Distribution Agreement") appointing the Distributor
exclusive distributor of the Fund's shares and providing for the Distributor to
bear distribution expenses not borne by the Fund. By its terms, the Distribution
Agreement has an initial term ending April 30, 1998, and provides that it will
remain in effect from year to year thereafter if approved by the Board.
The Distributor bears all expenses it may incur in providing services under
the Distribution Agreement. Such expenses include the payment of commissions for
sales of the Fund's shares and incentive compensation to account executives. The
Distributor also pays certain expenses in connection with the distribution of
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 of 1933, as amended. Under the Distribution Agreement, the
Distributor uses its best efforts in rendering services to the Fund, but in the
absence of willful misfeasance, bad faith, gross negligence or reckless
disregard of its obligations, the Distributor is not liable to the Fund or any
of its shareholders for any error of judgment or mistake of law or for any act
or omission or for any losses sustained by the Fund or its shareholders.
29
<PAGE>
PLAN OF DISTRIBUTION
To compensate the Distributor for the services it or any selected dealer
provides and for the expenses it bears under the Distribution Agreement, the
Fund has adopted a Plan of Distribution pursuant to Rule 12b-1 under the Act
(the "Plan") pursuant to which each Class, other than Class D, pays the
Distributor compensation accrued daily and payable monthly at the following
annual rates; 0.25% and 1.0% of the average daily net assets of Class A and
Class C, respectively, and, with respect to Class B, 1.0% of the lesser of: (a)
the average daily aggregate gross sales of the Fund's Class B shares since the
inception of the Fund (not including reinvestments of dividends or capital gains
distributions), less the average daily aggregate net asset value of the Fund's
Class B shares redeemed since the Fund's inception upon which a contingent
deferred sales charge has been imposed or upon which such charge has been
waived; or (b) the average daily net assets of Class B. The Distributor also
receives the proceeds of front-end sales charges and of contingent deferred
sales charges imposed on certain redemptions of shares, which are separate and
apart from payments made pursuant to the Plan (see "Purchase of Fund Shares" in
the Prospectus). The Distributor has informed the Fund that it and/or DWR
received (a) approximately $1,800, $484,000 and $983,855 in contingent deferred
sales charges from Class B for the period October 27, 1995 (commencement of
operations) through November 30, 1995 and for the fiscal years ended November
30, 1996 and 1997, respectively, (b) approximately $0 and $653 in contingent
deferred sales charges from Class A and Class C, respectively, for the fiscal
year ended November 30, 1997, and (c) approximately $11,990 in front-end sales
charges from Class A for the fiscal year ended November 30, 1997, none of which
was retained by the Distributor.
The Distributor has informed the Fund that the entire fee payable by Class A
and a portion of the fees payable each of Class B and Class C each year pursuant
to the Plan of Distribution equal to 0.25% of such Class's average daily net
assets are currently each characterized as a "service fee" under the Rules of
the Association of the National Association of Securities Dealers, Inc. (of
which the Distributor is a member). The "service fee" is a payment made for
personal service and/or the maintenance of shareholder accounts. The remaining
portion of the Plan fees payable by a Class, if any, is characterized as an
"asset-based sales charge" as such is defined by the aforementioned Rules of the
Association.
The Plan was adopted by a vote of the Trustees of the Fund on August 24,
1995, at a meeting of the Trustees called for the purpose of voting on such
Plan. The vote included the vote of a majority of the Trustees of the Fund who
are not "interested persons" of the Fund (as defined in the Act) and who have no
direct or indirect financial interest in the operation of the Plan (the
"Independent 12b-1 Trustees"). In making their decision to adopt the Plan, the
Trustees requested from the Distributor and received such information as they
deemed necessary to make an informed determination as to whether or not adoption
of the Plan was in the best interests of the shareholders of the Fund. After due
consideration of the information received, the Trustees, including the
Independent 12b-1 Trustees, determined that adoption of the Plan would benefit
the shareholders of the Fund. InterCapital, as then sole shareholder of the
Fund, approved the Plan on August 24, 1995, whereupon the Plan went into effect.
Under its terms, the Plan had an initial term ending April 30, 1996 and
provides that it will remain in effect from year to year thereafter, provided
such continuance is approved annually by a vote of the Trustees in the manner
described above. Prior to the Board's approval of Amendments to the Plan to
reflect the multiple-class structure for the Fund, the most recent continuance
of the Plan for one year, until April 30, 1998, was approved by the Trustees,
including a majority of the Independent 12b-1 Trustees, on April 24, 1997 at a
meeting called for the purpose of voting on such Plan. At that meeting the
Trustees and the Independent 12b-1 Trustees, after evaluating all the
information they deemed necessary to make an informed determination of whether
the Plan should be continued. The determination was based upon the conclusion of
the Trustees that the Plan provides an effective means of stimulating sales of
shares of the Fund and of reducing or avoiding net redemptions and the
potentially adverse effects that may occur therefrom. At their meeting held on
June 30, 1997, the Trustee, including a majority of the Independent 12b-1
Trustee, approved Amendments to the Plan to reflect the multiple-class structure
for the Fund, which took effect on July 28, 1997.
30
<PAGE>
Under the Plan and as required by Rule 12b-1, the Trustees will receive and
review promptly after the end of each fiscal quarter a written report provided
by the Distributor of the amounts expended by the Distributor under the Plan and
the purpose for which such expenditures were made. Class B shares of the Fund
accrued amounts payable to the Distributor under the Plan, during the fiscal
year ended November 30, 1997 of $3,434,993. This amount is equal to 1.0% of the
average daily net assets of Class B for the fiscal year and was calculated
pursuant to clause (b) of the compensation formula under the Plan. For the
fiscal period July 28 through November 30, 1997, Class A and Class C shares of
the Fund accrued payments under the Plan amounting to $197 and $2,400,
respectively, which amounts are equal to 0.25% and 1.00% of the average daily
net assets of Class A and Class C, respectively, for such period.
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 of shares, each with a different distribution arrangement as set forth
in the Prospectus.
With respect to Class A shares, DWR compensates its account executives by
paying them, from proceeds of the front-end sales charge, commissions for the
sale of Class A shares, currently a gross sales credit of up to 5.0% of the
amount sold (except as provided in the following sentence) and an annual
residual commission, currently a residual of up to 0.25% of the current value of
the respective accounts for which they are the account executives or dealers of
record in all cases. On orders of $1 million or more (for which no sales charge
was paid) or net asset value purchases by employer-sponsored (401k) and other
plans qualified under Section 401(a) of the Internal Revenue Code ("Qualified
Retirement Plans") for which Dean Witter Trust FSB ("DWT") serves as Trustee or
DWR's Retirement Plan serves as recordkeeper pursuant to a written Recordkeeping
Services Agreement, the Investment Manager compensates DWR's account executives
by paying them, from its own funds, a gross sales credit of 1.0% of the amount
sold.
With respect to Class B shares, DWR compensates its account executives by
paying them, from its own funds, commissions for the sale of Class B shares,
currently a gross sales credit of up to 5.0% of the amount sold (except as
provided in the following sentence) and an annual residual commission, currently
a residual of up to 0.25% of the current value (not including reinvested
dividends or distributions) of the amount sold in all cases. In the case of
Class B shares purchased on or after July 28, 1997 by Qualified Retirement Plans
for which DWT serves as Trustee for DWR's Retirement Plan Services serves as
recordkeeper pursuant to a written Recordkeeping Services Agreement, DWR
compensates its account executives by paying them, from its own funds, a gross
sales credit of 3.0% of the amount sold.
With respect to Class C shares, DWR compensates its account executives by
paying them, from its own funds, commissions for the sale of Class C shares,
currently a gross sales credit of up to 1.0% of the amount sold and an annual
residual commission, currently a residual of up to 1.0% of the current value of
the respective accounts for which they are the account executives of record.
With respect to Class D shares other than shares held by participants in
InterCapital's mutual fund asset allocation program, the Investment Manager
compensates DWR's account executives by paying them, from its own funds,
commissions for the sale of Class D shares, currently a gross sales credit of up
to 1.0% of the amount sold. There is a chargeback of 100% of the amount paid if
the Class D shares are redeemed in the first year and a chargeback of 50% of the
amount paid if the Class D shares are redeemed in the second year after
purchase. The Investment Manager also compensates DWR's account executives by
paying them, from its own funds, an annual residual commission, currently a
residual of up to 0.10% of the current value of the respective accounts for
which they are the account executives of record (not including accounts of
participants in the InterCapital mutual fund asset allocation program).
The gross sales credit is a charge which reflects commissions paid by DWR to
its account executives and Fund associated distribution-related expenses,
including sales compensation and overhead. The distribution fee that the
Distributor receives from the Fund under the Plan, in effect, offsets
distribu-
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<PAGE>
tion expenses incurred on behalf of the Fund and in the case of Class B shares,
opportunity costs, such as the gross sales credit and an assumed interest charge
thereon ("carrying charge"). In the Distributor's reporting of the distribution
expenses to the Fund, in the case of Class B shares, such assumed interest
(computed at the "broker's call rate") has been calculated on the gross sales
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 term
"overhead and other branch office distribution-related expenses" represents (a)
the expenses of operating DWR's branch offices in connection with the sale of
Fund shares, including lease costs, the salaries and employee benefits of
operations and sales support personnel, utility costs, communications costs and
the costs of stationery and supplies; (b) the costs of client sales seminars;
(c) travel expenses of mutual fund sales coordinators to promote the sale of
Fund shares; and (d) other expenses relating to branch promotion of Fund share
sales.
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 other than expenses representing the service fee, and, with respect to
Class C, in the case of all expenses other than expenses representing a gross
sales credit or a residual to account executives, such amounts shall be
determined at the beginning of each calendar quarter by the Trustees, including
a majority of the Independent 12b-1 Trustees. Expenses representing the service
fee (for Class A) or a gross sales credit or a residual to account executives
(for Class C) may be reimbursed without prior determination. In the event that
the Distributor proposes that monies shall be reimbursed for other than such
expenses, then in making quarterly determinations of the amounts that may be
reimbursed by the Fund, the Distributor will provide and the Trustees will
review a quarterly budget of projected distribution expenses to be incurred on
behalf of 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 November 30, 1997 to the Distributor. The
Distributor and DWR estimate that they have spent, pursuant to the Plan,
$19,341,226 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)
7.42% ($1,435,245) -- advertising and promotional expenses; (ii) 0.54%
($104,306) -- printing of prospectuses for distribution to other than current
shareholders; and (iii) 92.04% ($17,801,675) -- other expenses, including the
gross sales credit and the carrying charge, of which 5.47% ($974,187) represents
carrying charges, 37.92% ($6,751,188) represents commission credits to DWR
branch offices for payments of commissions to account executives and 56.61%
($10,076,300) represents overhead and other branch office distribution-related
expenses. These amounts represent amounts paid by Class B only; there were no
Class A or Class C shares outstanding on such date. The amounts accrued by Class
A and Class C for distribution during the fiscal period July 28 through November
30, 1997 were for expenses which relate to compensation of self-personnel and
associated overhead expenses.
In the case of Class B shares, at any given time, the expenses in
distributing shares of the Fund may be more or less than the total of (i) the
payments made by the Fund pursuant to the Plan and (ii) the proceeds of
contingent deferred sales charges paid by investors upon redemption of shares.
The Distributor has advised the Fund that in the case of Class B shares, the
excess amount, including the carrying charge designed to approximate the
opportunity costs incurred by DWR which arise from it
32
<PAGE>
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, totalled $12,299,293
at November 30, 1997. Because there is no requirement under the Plan that the
Distributor be reimbursed for all 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 distribution expenses in excess of payments made
under the Plan and the proceeds of contingent deferred sales charges paid by
investors upon redemption of shares, if for any reason the Plan is terminated,
the Trustees will consider at that time the manner in which to treat such
expenses. Any cumulative expenses incurred, but not yet recovered through
distribution fees or contingent deferred sales charges, may or may not be
recovered through future distribution fees or contingent deferred sales charges.
No interested person of the Fund nor any Trustee of the Fund who is not an
interested person of the Fund, as defined in the Act, has any direct or indirect
financial interest in the operation of the Plan except to the extent that the
Distributor, InterCapital, DWSC and DWR or certain of their employees may be
deemed to have such an interest as a result of benefits derived from the
successful operation of the Plan or as a result of receiving a portion of the
amounts expended thereunder by the Fund.
The Plan may not be amended to increase materially the amount to be spent
for the services described therein without approval of the shareholders of the
affected Class or Classes of the Fund, and all material amendments of the Plan
must also be approved by the Trustees in the manner described above. The Plan
may be terminated at any time, without payment of any penalty, by vote of a
majority of the Independent 12b-1 Trustees or by a vote of a majority of the
outstanding voting securities of the Fund (as defined in the Act) on not more
than thirty days' written notice to any other party to the Plan. So long as the
Plan is in effect, the election and nomination of Independent Trustees shall be
committed to the discretion of the Independent 12b-1 Trustees.
DETERMINATION OF NET ASSET VALUE
- --------------------------------------------------------------------------------
The net asset value per share for each Class of shares of the Fund is
determined once daily at 4:00 p.m. New York time (or, on days when the New York
Stock Exchange closes prior to 4 p.m., at such earlier times), on each day that
the New York Stock Exchange is open by taking the net assets of the Fund and
dividing by the number of shares outstanding and adjusting to the nearest cent.
The New York Stock Exchange currently observes the following holidays: New
Year's Day, Reverend Dr. Martin Luther King, Jr. Day, President's Day, Good
Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving Day, and
Christmas Day.
As stated in the Prospectus, short-term securities with remaining maturities
of sixty days or less at the time of purchase are valued at amortized cost,
unless the Trustees determine such does not reflect the securities' market
value, in which case these securities will be valued at their fair value as
determined by the Trustees. Other short-term debt securities will be valued on a
mark-to-market basis until such time as they reach a remaining maturity of 60
days, whereupon they will be valued at amortized cost using their value on the
61st day unless the Trustees determine such does not reflect the securities'
market value, in which case these securities will be valued at their fair value
as determined by the Trustees. 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 and all options on equity securities are valued at the mean between
their latest bid and asked prices. 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 by the Trustees. All other securities
and other assets are valued at their fair value as determined in good faith
under procedures established by and under the supervision of the Trustees.
Generally, trading in foreign securities, as well as corporate bonds, United
States 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
33
<PAGE>
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 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 materially affecting
the value of such securities occur during such period, then these securities
will be valued at their fair value as determined in good faith under procedures
established by and under the supervision of the Trustees.
PURCHASE OF FUND SHARES
- --------------------------------------------------------------------------------
As discussed in the Prospectus, the Fund offers four Classes of shares as
follows:
INITIAL SALES CHARGE ALTERNATIVE--CLASS A SHARES
Class A shares are sold to investors with an initial sales charge that
declines to zero for larger purchases; however, Class A shares sold without an
initial sales charge are subject to a contingent deferred sales charge ("CDSC")
of 1.0% if redeemed within one year of purchase, except in the circumstances
discussed in the Prospectus.
Right of Accumulation. As discussed in the Prospectus, investors may
combine the current value of shares purchased in separate transactions for
purposes of benefitting from the reduced sales charges available for purchases
of shares of the Fund totalling at least $25,000 in net asset value. For
example, if any person or entity who qualifies for this privilege holds Class A
shares of the Fund and/or other Dean Witter Funds that are multiple class funds
("Dean Witter Multi-Class Funds") or shares of other Dean Witter Funds sold with
a front-end sales charge purchased at a price including a front-end sales charge
having a current value of $5,000, and purchases $20,000 of additional shares of
the Fund, the sales charge applicable to the $20,000 purchase would be 4.75% of
the offering price.
The Distributor must be notified by the selected broker-dealer or the
shareholder at the time a purchase order is placed that the purchase qualifies
for the reduced charge under the Right of Accumulation. Similar notification
must be made in writing by the selected broker-dealer or shareholder when such
an order is placed by mail. The reduced sales charge will not be granted if: (a)
such notification is not furnished at the time of the order; or (b) a review of
the records of the Distributor or Dean Witter Trust FSB (the "Transfer Agent")
fails to confirm the investor's represented holdings.
Letter of Intent. As discussed in the Prospectus, reduced sales charges are
available to investors who enter into a written Letter of Intent providing for
the purchase, within a thirteen-month period, of Class A shares of the Fund from
the Distributor or from a single Selected Broker-Dealer.
A Letter of Intent permits an investor to establish a total investment goal
to be achieved by any number of purchases over a thirteen-month period. Each
purchase of Class A shares made during the period will receive the reduced sales
commission applicable to the amount represented by the goal, as if it were a
single purchase. A number of shares equal in value to 5% of the dollar amount of
the Letter of Intent will be held in escrow by the Transfer Agent, in the name
of the shareholder. The initial purchase under a Letter of Intent must be equal
to at least 5% of the stated investment goal.
The Letter of Intent does not obligate the investor to purchase, nor the
Fund to sell, the indicated amount. In the event the Letter of Intent goal is
not achieved within the thirteen-month period, the investor is required to pay
the difference between the sales charge otherwise applicable to the purchases
made during this period and sales charges actually paid. Such payment may be
made directly to the Distributor or, if not paid, the Distributor is authorized
by the shareholder to liquidate a sufficient number of his or her escrowed
shares to obtain such difference.
If the goal is exceeded and purchases pass the next sales charge level, the
sales charge on the entire amount of the purchase that results in passing that
level and on subsequent purchases will be subject to further reduced sales
charges in the same manner as set forth above under "Right of Accumulation," but
there will be no retroactive reduction of sales charges on previous purchases.
For
34
<PAGE>
the purpose of determining whether the investor is entitled to a further reduced
sales charge applicable to purchases at or above a sales charge level which
exceeds the stated goal of a Letter of Intent, the cumulative current net asset
value of any shares owned by the investor in any other Dean Witter Funds held by
the shareholder which were previously purchased at a price including a front-end
sales charge (including shares of the Fund and other Dean Witter Funds acquired
in exchange for those shares, and including in each case shares acquired through
reinvestment of dividends and distributions) will be added to the cost or net
asset value of shares of the Fund owned by the investor. However, shares of
"Exchange Funds" (see "Shareholder Services--Exchange Privilege") and the
purchase of shares of other Dean Witter Funds will not be included in
determining whether the stated goal of a Letter of Intent has been reached.
At any time while a Letter of Intent is in effect, a shareholder may, by
written notice to the Distributor, increase the amount of the stated goal. In
that event, only shares purchased during the previous 90-day period and still
owned by the shareholder will be included in the new sales charge reduction. The
5% escrow and minimum purchase requirements will be applicable to the new stated
goal. Investors electing to purchase shares of the Fund pursuant to a Letter of
Intent should carefully read such Letter of Intent.
CONTINGENT DEFERRED SALES CHARGE ALTERNATIVE--CLASS B SHARES
Class B shares are sold without an initial sales charge but are subject to a
CDSC payable upon most redemptions within six years after purchase. As stated in
the Prospectus, a CDSC will be imposed on any redemption by an investor if after
such redemption the current value of the investor's Class B shares of the Fund
is less than the dollar amount of all payments by the shareholder for the
purchase of Class B shares during the preceding six years (or, in the case of
shares held by certain Qualified Retirement Plans, three years). However, no
CDSC will be imposed to the extent that the net asset value of the shares
redeemed does not exceed: (a) the current net asset value of shares purchased
more than six years (or, in the case of shares held by certain Qualified
Retirement Plans, three years) prior to the redemption, plus (b) the current net
asset value of shares purchased through reinvestment of dividends or
distributions of the Fund or another Dean Witter Fund (see "Shareholder
Services--Targeted Dividends"), plus (c) the current net asset value of shares
acquired in exchange for (i) shares of Dean Witter front-end sales charge funds,
or (ii) shares of other Dean Witter Funds for which shares of front-end sales
charge funds have been exchanged (see "Shareholder Services--Exchange
Privilege"), plus (d) increases in the net asset value of the investor's shares
above the total amount of payments for the purchase of Fund shares made during
the preceding six (three) years. The CDSC will be paid to the Distributor.
In determining the applicability of the CDSC to each redemption, the amount
which represents an increase in the net asset value of the investor's shares
above the amount of the total payments for the purchase of shares within the
last six years (or, in the case of shares held by certain Qualified Retirement
Plans, three years) will be redeemed first. In the event the redemption amount
exceeds such increase in value, the next portion of the amount redeemed will be
the amount which represents the net asset value of the investor's shares
purchased more than six (three) years prior to the redemption and/or shares
purchased through reinvestment of dividends or distributions and/or shares
acquired in exchange for shares of Dean Witter front-end sales charge funds, or
for shares of other Dean Witter funds for which shares of front-end sales charge
funds have been exchanged. A portion of the amount redeemed which exceeds an
amount which represents both such increase in value and the value of shares
purchased more than six years (or, in the case of shares held by certain
Qualified Retirement Plans, three years) prior to the redemption and/or shares
purchased through reinvestment of dividends or distributions and/ or shares
acquired in the above-described exchanges will be subject to a CDSC.
The amount of the CDSC, if any, will vary depending on the number of years
from the time of payment for the purchase of Class B shares of the Fund until
the time of redemption of such shares. For purposes of determining the number of
years from the time of any payment for the purchase of shares, all payments made
during a month will be aggregated and deemed to have been made on the last day
of
35
<PAGE>
the month. The following table sets forth the rates of the CDSC applicable to
most Class B shares of the Fund:
<TABLE>
<CAPTION>
YEAR SINCE
PURCHASE CDSC AS A PERCENTAGE OF
PAYMENT MADE AMOUNT REDEEMED
- ----------------------------------------------------------------------------------------- ---------------------------
<S> <C>
First.................................................................................... 5.0%
Second................................................................................... 4.0%
Third.................................................................................... 3.0%
Fourth................................................................................... 2.0%
Fifth.................................................................................... 2.0%
Sixth.................................................................................... 1.0%
Seventh and thereafter................................................................... None
</TABLE>
The following table sets forth the rates of the CDSC applicable to Class B
shares of the Fund purchased on or after July 28, 1997 by Qualified Retirement
Plans for which DWT serves as Trustee or DWR's Retirement Plan Services serves
as recordkeeper pursuant to a written Recordkeeping Services Agreement:
<TABLE>
<CAPTION>
YEAR SINCE
PURCHASE CDSC AS A PERCENTAGE OF
PAYMENT MADE AMOUNT REDEEMED
- ----------------------------------------------------------------------------------------- ---------------------------
<S> <C>
First.................................................................................... 2.0%
Second................................................................................... 2.0%
Third.................................................................................... 1.0%
Fourth and thereafter.................................................................... None
</TABLE>
In determining the rate of the CDSC, it will be assumed that a redemption is
made of shares held by the investor for the longest period of time within the
applicable six-year or three-year period. This will result in any such CDSC
being imposed at the lowest possible rate. The CDSC will be imposed, in
accordance with the table shown above, on any redemptions within six years (or,
in the case of shares held by certain Qualified Retirement Plans, three years)
of purchase which are in excess of these amounts and which redemptions do not
qualify for waiver of the CDSC, as described in the Prospectus.
LEVEL LOAD ALTERNATIVE--CLASS C SHARES
Class C shares are sold without a sales charge but are subject to a CDSC of
1.0% on most redemptions made within one year after purchase, except in the
circumstances discussed in the Prospectus.
NO LOAD ALTERNATIVE--CLASS D SHARES
Class D shares are offered without any sales charge on purchase or
redemption. Class D shares are offered only to those persons meeting the
qualifications set forth in the Prospectus.
SHAREHOLDER SERVICES
- --------------------------------------------------------------------------------
Upon the purchase of shares of the Fund, a Shareholder Investment Account is
opened for the investor on the books of the Fund and maintained by the Transfer
Agent. This is an open account in which shares owned by the investor are
credited by the Transfer Agent in lieu of issuance of a share certificate. If a
share certificate is desired, it must be requested in writing for each
transaction. Certificates are issued only for full shares and may be redeposited
in the account at any time. There is no charge to the investor for issuance of a
certificate. Whenever a shareholder instituted transaction takes place in the
Shareholder Investment Account, the shareholder will be mailed a confirmation of
the transaction from the Fund or from DWR or other selected broker-dealer.
AUTOMATIC INVESTMENT OF DIVIDENDS AND DISTRIBUTIONS. As stated in the
Prospectus, all income dividends and capital gains distributions are
automatically paid in full and fractional shares of the applicable Class of the
Fund, unless the shareholder requests that they be paid in cash. Each purchase
36
<PAGE>
of shares of the Fund is made upon the condition that the Transfer Agent is
thereby automatically appointed as agent of the investor to receive all
dividends and capital gains distributions on shares owned by the investor. Such
dividends and distributions will be paid, at the net asset value per share, in
shares of the applicable Class of the Fund (or in cash if the shareholder so
requests) as of the close of business on the record date. At any time an
investor may request the Transfer Agent, in writing, to have subsequent
dividends and/or capital gains distributions paid to him or her in cash rather
than shares. To assure sufficient time to process the charge, such request
should be received by the Transfer Agent at least five business days prior to
the record date of the dividend or distribution. In the case of recently
purchased shares for which registration instructions have not been received on
the record date, cash payments will be made to the Distributor, which will be
forwarded to the shareholder, upon the receipt of proper instructions. It has
been and remains the Fund's policy and practice that, if checks for dividends or
distributions paid in cash remain uncashed, no interest will accrue on amounts
represented by such uncashed checks.
Targeted Dividends.-SM- In states where it is legally permissible,
shareholders may also have all income dividends and capital gains distributions
automatically invested in shares of any Class of an open-end Dean Witter Fund
other than Dean Witter Capital Appreciation Fund or in another Class of Dean
Witter Capital Appreciation Fund. Such investment will be made as described
above for automatic investment in shares in shares of the applicable Class of
the Fund, at the net asset value per share of the selected Dean Witter Fund as
of the close of business on the payment date of the dividend or distribution and
will begin to earn dividends, if any, in the selected Dean Witter Fund the next
business day. Shareholders of Dean Witter Capital Appreciation Fund must be
shareholders of the selected Class of the Dean Witter Fund targeted to receive
investments from dividends at the time they enter the Targeted Dividends
program. Investors should review the prospectus of the targeted Dean Witter Fund
before entering the program.
Easyinvest.-SM- Shareholders may subscribe to EasyInvest, an automatic
purchase plan which provides for any amount from $100 to $5,000 to be
transferred automatically from a checking or savings account or following
redemption of shares of a Dean Witter money market fund, on a semi-monthly,
monthly or quarterly basis, to the Transfer Agent for investment in shares of
the Fund. Shares purchased through EasyInvest will be added to the shareholder's
existing account at the net asset value calculated the same business day the
transfer of funds is effected. (Subject to any applicable sales charges). Shares
of the Dean Witter money market funds redeemed in connection with EasyInvest are
redeemed on the business day preceding the transfer of funds. For further
information or to subscribe to EasyInvest, shareholders should contact their DWR
or other selected broker-dealer account executive or the Transfer Agent.
Investment of Dividends or Distributions Received in Cash. As discussed in
the Prospectus, any shareholder who receives a cash payment representing a
dividend or distribution may invest such dividend or distribution in shares of
the applicable Class at the net asset value next determined after receipt by the
Transfer Agent, without the imposition of a CDSC upon redemption, by returning
the check or the proceeds to the Transfer Agent within thirty days after the
payment date. If the shareholder returns the proceeds of a dividend or
distribution, such funds must be accompanied by a signed statement indicating
that the proceeds constitute a dividend or distribution to be invested. Such
investment will be made at the net asset value per share next determined after
receipt of the check or proceeds by the Transfer Agent.
Systematic Withdrawal Plan. As discussed in the Prospectus, a systematic
withdrawal plan (the "Withdrawal Plan") is available for shareholders who own or
purchase shares of the Fund having a minimum value of $10,000 based upon the
then current net asset value. The Withdrawal Plan provides for monthly or
quarterly (March, June, September and December) checks in any dollar amount, not
less than $25, or in any whole percentage of the account balance, on an
annualized basis. Any applicable CDSC will be imposed on shares redeemed under
the Withdrawal Plan (see "Purchase of Fund Shares" in the Prospectus).
Therefore, any shareholder participating in the Withdrawal Plan will have
sufficient
37
<PAGE>
shares redeemed from his or her account so that the proceeds (net of any
applicable CDSC) to the shareholder will be the designated monthly or quarterly
amount.
The Transfer Agent acts as an agent for the shareholder in tendering to the
Fund for redemption sufficient full and fractional shares to provide the amount
of the periodic withdrawal payment designated in the application. The shares
will be redeemed at their net asset value determined, at the shareholder's
option, on the tenth or twenty-fifth day (or next following business day) of the
relevant month or quarter and normally a check for the proceeds will be mailed
by the Transfer Agent within five business days after the date of redemption.
The Withdrawal Plan may be terminated at any time by the Fund.
Withdrawal Plan payments should not be considered as dividends, yields or
income. If periodic withdrawal plan payments continuously exceed net investment
income and net capital gains, the shareholder's original investment will be
correspondingly reduced and ultimately exhausted.
Each withdrawal constitutes a redemption of shares and any gain or loss
realized must be recognized for Federal income tax purposes. Although the
shareholder may make additional investments of $2,500 or more under the
Withdrawal Plan, withdrawals made concurrently with purchases of additional
shares may be inadvisable because of sales charges which may be applicable to
purchases or redemptions of shares (see "Purchase of Fund Shares").
Any shareholder who wishes to have payments under the Withdrawal Plan made
to a third party or sent to an address other than the one listed on the account
must send complete written instructions to the Transfer Agent to enroll in the
Withdrawal Plan. The shareholder's signature on such instructions must be
guaranteed by an eligible guarantor acceptable to the Transfer Agent
(shareholders should contact the Transfer Agent for a determination as to
whether a particular institution is such an eligible guarantor). A shareholder
may, at any time, change the amount and interval of withdrawal payments through
his or her Account Executive or by written nomination to the Transfer Agent. In
addition, the party and/or the address to which the checks are mailed may be
changed by written notification to the Transfer Agent, with signature guarantees
required in the manner described above. The shareholder may also terminate the
Withdrawal Plan at any time by written notice to the Transfer Agent. In the
event of such termination, the account will be continued as a regular
shareholder investment account. The shareholder may also redeem all or part of
the shares held in the Withdrawal Plan account (see "Redemptions and
Repurchases" in the Prospectus) at any time.
Direct Investments Through Transfer Agent. As discussed in the Prospectus,
shareholders may make additional investments in any Class of shares of the Fund
for which they qualify at any time by sending a check in any amount, not less
than $100, payable to Dean Witter Capital Appreciation Fund, and indicating the
selected Class, directly to the Fund's Transfer Agent. In the case of Class A
shares, after deduction of any applicable sales charge, the balance will be
applied to the purchase of Fund shares, and, in the case of shares of the other
Classes, the entire amount will be applied to the purchase of Fund shares, at
the net asset value per share next computed after receipt of the check or
purchase payment by the Transfer Agent. The shares so purchased will be credited
to the investor's account.
EXCHANGE PRIVILEGE
As discussed in the Prospectus, the Fund makes available to its shareholders
an Exchange Privilege whereby shareholders of each Class of shares of the Fund
may exchange their shares for shares of the same Class of shares of any other
Dean Witter Multi-Class Fund without the imposition of any exchange fee. Shares
may also be exchanged for shares of any of the following funds: Dean Witter
Short-Term U.S. Treasury Trust, Dean Witter Limited Term Municipal Trust, Dean
Witter Short-Term Bond Fund, Dean Witter Intermediate Term U.S. Treasury Trust
and five Dean Witter Funds which are money market funds (the foregoing nine
funds are hereinafter referred to as the "Exchange Funds"). Class A shares may
also be exchanged for shares of Dean Witter Multi-State Municipal Series Trust
and Dean Witter Hawaii Municipal Trust, which are Dean Witter Funds sold with a
front-end sales charge ("FSC Funds"). Class B shares may also be exchanged for
shares of Dean Witter Global Short-Term Income Fund Inc. ("Global Short-Term"),
which is a Dean Witter Fund offered with a CDSC. Exchanges may be made after the
shares of the Fund acquired by purchase (not by exchange or dividend
reinvestment)
38
<PAGE>
have been held for thirty days. There is no waiting period for exchanges of
shares acquired by exchange or dividend reinvestment. An exchange will be
treated for federal income tax purposes the same as a repurchase or redemption
of shares, on which the shareholder may realize a capital gain or loss.
Any new account established through the Exchange Privilege will have the
same registration and cash dividend or dividend reinvestment plan as the present
account, unless the Transfer Agent receives written notification to the
contrary. For telephone exchanges, the exact registration of the existing
account and the account number must be provided.
Any shares held in certificate form cannot be exchanged but must be
forwarded to the Transfer Agent and deposited into the shareholder's account
before being eligible for exchange. (Certificates mailed in for deposit should
not be endorsed.)
As described below, and in the Prospectus under the caption "Purchase of
Fund Shares," a CDSC may be imposed upon a redemption, depending on a number of
factors, including the number of years from the time of purchase until the time
of redemption or exchange ("holding period"). When shares of a Dean Witter
Multi-Class Fund or Global Short-Term are exchanged for shares of an Exchange
Fund, the exchange is executed at no charge to the shareholder, without the
imposition of the CDSC at the time of the exchange. During the period of time
the shareholder remains in the Exchange Fund (calculated from the last day of
the month in which the Exchange Fund shares were acquired), the holding period
or "year since purchase payment made" is frozen. When shares are redeemed out of
the Exchange Fund, they will be subject to a CDSC which would be based upon the
period of time the shareholder held shares in a Dean Witter Multi-Class Fund or
Global Short-Term. However, in the case of shares exchanged into an Exchange
Fund on or after April 23, 1990, upon a redemption of shares which results in a
CDSC being imposed, a credit (not to exceed the amount of the CDSC) will be
given in an amount equal to the Exchange Fund 12b-1 distribution fees, if any,
incurred on or after that date which are attributable to those shares.
Shareholders acquiring shares of an Exchange Fund pursuant to this exchange
privilege may exchange those shares back into a Dean Witter Multi-Class Fund or
Global Short-Term from the Exchange Fund, with no CDSC being imposed on such
exchange. The holding period previously frozen when shares were first exchanged
for shares of the Exchange Fund resumes on the last day of the month when shares
of a Dean Witter Multi-Class Fund or of Global Short-Term are reacquired. A CDSC
is imposed only upon an ultimate redemption, based upon the time (calculated as
described above) the shareholder was invested in a Dean Witter Multi-Class Fund
or in Global Short-Term. In the case of exchanges of Class A shares which are
subject to a CDSC, the holding period also includes the time (calculated as
described above) the shareholder was invested in a FSC Fund.
When shares initially purchased in a Dean Witter Multi-Class or in Global
Short-Term are exchanged for shares of a Dean Witter Multi-Class Fund, share of
Global Short-Term, shares of a FSC Fund or for shares of an Exchange Fund, the
date of purchase of the shares of the fund exchanged into, for purposes of the
CDSC upon redemption, will be the last day of the month in which the shares
being exchanged were originally purchased. In allocating the purchase payments
between funds for purposes of the CDSC, the amount which represents the current
net asset value of shares at the time of the exchange which were (i) purchased
more than one, three or six years (depending on the CDSC schedule applicable to
the shares) prior to the exchange, (ii) originally acquired through reinvestment
of dividends or distributions and (iii) acquired in exchange for shares of FSC
Funds, or for shares of other Dean Witter Funds for which shares of FSC Funds
have been exchanged (all such shares called "Free Shares"), will be exchanged
first. After an exchange, all dividends earned on shares in an Exchange Fund
will be considered Free Shares. If the exchanged amount exceeds the value of
such Free Shares, an exchange is made, on a block-by-block basis, of non-Free
Shares held for the longest period of time (except that with respect to Class B
shares, if shares held for identical periods of time but subject to different
CDSC schedules are held in the same Exchange Privilege account, the shares of
that block that are subject to a lower CDSC rate will be exchanged prior to the
shares of that block that are subject to a higher CDSC rate). Shares equal to
any appreciation in the value of non-Free Shares exchanged will be treated as
Free Shares, and the amount of the purchase payments for the non-Free Shares of
the fund exchanged into will be equal to the lesser of (a) the purchase payments
for, or (b) the current net asset
39
<PAGE>
value of, the exchanged non-Free Shares. If an exchange between funds would
result in exchange of only part of a particular block of non-Free Shares, then
shares equal to any appreciation in the value of the block (up to the amount of
the exchange) will be treated as Free Shares and exchanged first, and the
purchase payment for that block will be allocated on a pro rata basis between
the non-Free Shares of that block to be retained and the non-Free Shares to be
exchanged. The prorated amount of such purchase payment attributable to the
retained non-Free Shares will remain as the purchase payment for such shares,
and the amount of purchase payment for the exchanged non-Free Shares will be
equal to the lesser of (a) the prorated amount of the purchase payment for, or
(b) the current net asset value of, those exchanged non-Free Shares. Based upon
the procedures described in the Prospectus under the caption "Purchase of Fund
Shares," any applicable CDSC will be imposed upon the ultimate redemption of
shares of any fund, regardless of the number of exchanges since those shares
were originally purchased.
With respect to the redemption or repurchase of shares of the Fund, the
application of proceeds to the purchase of new shares in the Fund or any other
of the funds and the general administration of the Exchange Privilege, the
Transfer Agent acts as agent for the Distributor and for the shareholder's
selected broker-dealer, if any, in the performance of such functions. With
respect to exchanges, redemptions or repurchases, the Transfer Agent shall be
liable for its own negligence and not for the default or negligence of its
correspondents or for losses in transit. The Fund shall not be liable for any
default or negligence of the Transfer Agent, the Distributor or any selected
broker-dealer.
The Distributor and any selected broker-dealer have authorized and appointed
the Transfer Agent to act as their agent in connection with the application of
proceeds of any redemption of Fund shares to the purchase of shares of any other
fund and the general administration of the Exchange Privilege. No commission or
discounts will be paid to the Distributor or any selected broker-dealer for any
transactions pursuant to this Exchange Privilege.
Exchanges are subject to the minimum investment requirement and any other
conditions imposed by each fund. (The minimum initial investment for the
Exchange Privilege account of each Class is $5,000 for Dean Witter Liquid Asset
Fund Inc., Dean Witter Tax-Free Daily Income Trust, Dean Witter California
Tax-Free Daily Income Trust and Dean Witter New York Municipal Money Market
Trust, although those funds may, at their discretion, accept initial investments
of as low as $1,000. The minimum investment for the Exchange Privilege account
of each Class is $10,000 for Dean Witter Short-Term U.S. Treasury Trust,
although that fund, in its discretion, may accept initial purchases as low as
$5,000. The minimum initial investment for the Exchange Privilege account of
each Class is $5,000 for Dean Witter Special Value Fund. The minimum initial
investment for the Exchange Privilege account of each Class for all other Dean
Witter Funds for which the Exchange Privilege is available is $1,000.) Upon
exchange into an Exchange Fund, the shares of that fund will be held in a
special Exchange Privilege Account separately from accounts of those
shareholders who have acquired their shares directly from that fund. As a
result, certain services normally available to shareholders of those funds,
including the check writing feature, will not be available for funds held in
that account.
The Fund and each of the other Dean Witter Funds may limit the number of
times this Exchange Privilege may be exercised by any investor within a
specified period of time. Also, the Exchange Privilege may be terminated or
revised at any time by the Fund and/or any of the Dean Witter Funds for which
shares of the Fund have been exchanged, upon such notice as may be required by
applicable regulatory agencies (presently sixty days' prior written notice for
termination or material revision), provided that six months' prior written
notice of termination will be given to the shareholders who hold shares of
Exchange Funds, pursuant to the Exchange Privilege, and provided further that
the Exchange Privilege may be terminated or materially revised without notice at
times (a) when the New York Stock Exchange is closed for other than customary
weekends and holidays, (b) when trading on that Exchange is restricted, (c) when
an emergency exists as a result of which disposal by the Fund of securities
owned by it is not reasonably practicable or it is not reasonably practicable
for the Fund fairly to determine the value of its net assets, (d) during any
other period when the Securities and Exchange Commission by order so permits
(provided that applicable rules and regulations of the Securities and Exchange
Commission shall govern as to
40
<PAGE>
whether the conditions prescribed in (b) or (c) exist) or (e) if the Fund would
be unable to invest amounts effectively in accordance with its investment
objective, policies and restrictions.
The current prospectus for each fund describes its investment objective(s)
and policies, and shareholders should obtain a copy and examine it carefully
before investing. An exchange will be treated for federal income tax purposes
the same as a repurchase or redemption of shares, on which the shareholder may
realize a capital gain or loss. However, the ability to deduct capital losses on
an exchange may be limited in situations where there is an exchange of shares
within ninety days after the shares are purchased. The Exchange Privilege is
only available in states where an exchange may legally be made.
For further information regarding the Exchange Privilege, shareholders
should contact their DWR or other selected broker-dealer account executive or
the Transfer Agent.
REDEMPTIONS AND REPURCHASES
- --------------------------------------------------------------------------------
Redemption. As stated in the Prospectus, shares of each Class of the Fund
can be redeemed for cash at any time at the net asset value per share next
determined; however, such redemption proceeds will be reduced by the amount of
any applicable CDSC. If shares are held in a shareholder's account without a
share certificate, a written request for redemption to the Fund's Transfer Agent
at P.O. Box 983, Jersey City, NJ 07303 is required. If certificates are held by
the shareholder, the shares may be redeemed by surrendering the certificates
with a written request for redemption. The share certificate, or an accompanying
stock power, and the request for redemption, must be signed by the shareholder
or shareholders exactly as the shares are registered. Each request for
redemption, whether or not accompanied by a share certificates, must be sent to
the Fund's Transfer Agent, which will redeem the shares at their net asset value
next computed (see "Purchase of Fund Shares" in the Prospectus) after it
receives the request, and certificate, if any, in good order. Any redemption
request received after such computation will be redeemed at the next determined
net asset value. The term "good order" means that the share certificate, if any,
and request for redemption, are properly signed, accompanied by any
documentation required by the Transfer Agent, and bear signature guarantees when
required by the Fund or the Transfer Agent. If redemption is requested by a
corporation, partnership, trust or fiduciary, the Transfer Agent may require
that written evidence of authority acceptance to the Transfer Agent be submitted
before such request is accepted.
Whether certificates are held by the shareholder or shares are held in a
shareholder's account, if the proceeds are to be paid to any person other than
the record owner, or if the proceeds are to be paid to a corporation (other than
the Distributor or a selected broker-dealer for the account of the shareholder),
partnership, trust or fiduciary, or sent to the shareholder at an address other
than the registered address, signatures must be guaranteed by an eligible
guarantor. A stock power may be obtained from any dealer or commercial bank. The
Fund may change the signature guarantee requirements from time to time upon
notice to shareholders, which may be a means of a supplement to the prospectus
or a new prospectus.
Repurchase. As stated in the Prospectus, DWR and other selected
broker-dealers are authorized to repurchase shares represented by a share
certificate which is delivered to any of their offices. Shares held in a
shareholder's account without a share certificate may also be repurchased by DWR
and other selected broker-dealers upon the telephonic request of the
shareholder. The repurchase price is the net asset value next computed after
such purchase order is received by DWR or other selected broker-dealer reduced
by any applicable CDSC.
Payment for Shares Redeemed or Repurchased. As discussed in the Prospectus,
payment for shares of any Class presented for repurchase or redemption will be
made by check within seven days after receipt by the Transfer Agent of the
certificate and/or written request in good order. Such payment may be postponed
or the right of redemption suspended at times (a) when the New York Stock
Exchange is closed for other than customary weekends and holidays, (b) when
trading on that Exchange is restricted, (c) when an emergency exists as a result
of which disposal by the Fund of
41
<PAGE>
securities owned by it is not reasonably practicable or it is not reasonably
practicable for the Fund fairly to determine the value of its net assets, or (d)
during any period when the Securities and Exchange Commission by order so
permits; provided that applicable rules and regulations of the Securities and
Exchange Commission shall govern as to whether the conditions prescribed in (b)
or (c) exist. If the shares to be redeemed have recently been purchased by
check, payment of the redemption proceeds may be delayed for the minimum time
needed to verify that the check used for investment has been honored (not more
than fifteen days from the time of receipt of the check by the Transfer Agent).
It has been and remains the Fund's policy and practice that, if checks for
redemption proceeds remain uncashed, no interest will accrue on amounts
represented by such uncashed checks. Shareholders maintaining margin accounts
with DWR or another selected broker-dealer are referred to their account
executive regarding restrictions on redemption of shares of the Fund pledged in
the margin account.
Transfers of Shares. In the event a shareholder requests a transfer of any
shares to a new registration, such shares will be transferred without sales
charge at the time of transfer. With regard to the status of shares which are
either subject to the CDSC or free of such charge (and with regard to the length
of time shares subject to the charge have been held), any transfer involving
less than all 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.
Reinstatement Privilege. As discussed in the Prospectus, a shareholder who
has had his or her shares redeemed or repurchased and has not previously
exercised this reinstatement privilege may, within 35 days after the redemption
or repurchase, reinstate any portion or all of the proceeds of such redemption
or repurchase in shares of the Fund in the same Class at the net asset value
next determined after a reinstatement request, together with the proceeds, is
received by the Transfer Agent.
Exercise of the reinstatement privilege will not affect the federal income
tax and state income tax treatment of any gain or loss realized upon the
redemption or repurchase, except that if the redemption or repurchase resulted
in a loss and reinstatement is made in shares of the Fund, some or all of the
loss, depending on the amount reinstated, will not be allowed as a deduction for
federal income tax and state personal income tax purposes but will be applied to
adjust the cost basis of the shares acquired upon reinstatement.
DIVIDENDS, DISTRIBUTIONS AND TAXES
- --------------------------------------------------------------------------------
As discussed in the Prospectus, the Fund will determine either to distribute
or to retain all or part of any net long-term capital gains in any year for
reinvestment. If any such gains are retained, the Fund will pay federal income
tax thereon, and, if the Fund makes an election, the shareholders would include
such undistributed gains in their income and shareholders will be able to claim
their share of the tax paid by the Fund as a credit against their individual
federal income tax.
Any dividends declared in the last quarter of any calendar year which are
paid in the following calendar year prior to February 1 will be deemed received
by the shareholder in the prior calendar year.
Gains or losses on sales of securities by the Fund will generally be
long-term capital gains or losses if the securities have been held by the Fund
for more than twelve months. Gains or losses on the sale of securities held for
twelve months or less will be generally short-term capital gains or losses.
Distributions of net long-term capital gains, if any, are taxable to
shareholders as long-term capital gains regardless of how long a shareholder has
held the Fund's shares and regardless of whether the distribution is received in
additional shares or in cash. Capital gains distributions are not eligible for
the dividends received deduction. Treasury intends to issue regulations to
permit shareholders to take into account their proportionate share of the Fund's
capital gains distributions that will be subject to a reduced rate under the
Taxpayer Relief Act of 1997. The Taxpayer Relief Act reduces the maximum tax on
long-term capital gains from 28% to 20%; however, it also lengthenes the
required holding period to
42
<PAGE>
obtain the lower rate from more than 12 months to more than 18 months. The lower
rates do not apply to collectibles and certain other assets. Additionally, the
maximum capital gain rate for assets that are held more than five years and that
are acquired after December 31, 2000 is 18%.
The Fund intends to qualify as a regulated investment company under
Subchapter M of the Internal Revenue Code of 1986 (the "Code"). If so qualified,
the Fund will not be subject to federal income tax on its net investment income
and capital gains, if any, realized during any fiscal year in which it
distributes such income and capital gains to its shareholders. In addition, the
Fund intends to distribute to its shareholders each calendar year a sufficient
amount of ordinary income and capital gains to avoid the imposition of a 4%
excise tax. Shareholders will normally have to pay federal income taxes, and any
state and/or local income taxes, on the dividends and 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. Any dividends declared
in the last quarter of any calendar year which are paid in the following year
prior to February 1 will be deemed received by the shareholder in the prior
year.
After the end of the calendar year, shareholders will be sent full
information on their dividends and capital gains distributions for tax purposes.
Shareholders will also be notified of their proportionate share of long-term
capital gains distributions that are eligible for a reduced rate of tax under
the Taxpayer Relief Act of 1997. To avoid being subject to a 31% Federal backup
withholding tax on taxable dividends, capital gains distributions and the
proceeds of redemptions and repurchases, shareholders' taxpayer identification
numbers must be furnished and certified as to their accuracy.
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, capital gains distributions and
dividends normally 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 net long-term capital
gains, such payment or distribution would be in part a return of the
shareholder's investment to the extent of such reduction below the shareholder's
cost, but nonetheless would be fully taxable. Therefore, an investor should
consider the tax implications of purchasing Fund shares immediately prior to a
distribution record date.
Any loss realized by shareholders upon a redemption of shares within six
months of the date of their purchase will be treated as long-term capital loss
to the extent of any distributions of net long-term capital gains during the
six-month period.
The Fund may elect to retain net capital gains and pay corporate income tax
thereon. In such event, each shareholder of record on the last day of the Fund's
taxable year would be required to include in income for tax purposes such
shareholder's proportionate share of the Fund's undistributed net capital gain.
In addition, each shareholder would be entitled to credit such shareholder's
proportionate share of the tax paid by the Fund against federal income tax
liabilities, to claim refunds to the extent that the credit exceeds such
liabilities, and to increase the basis of his shares held for federal income tax
purposes by an amount equal to 65% of such shareholder's proportionate share of
the undistributed net capital gain.
Dividends, interest and capital gains received by the Fund may give rise to
withholding and other taxes imposed by foreign countries. Tax conventions
between certain countries and the United States may reduce or eliminate such
taxes. Investors may be entitled to claim United States foreign tax credits or
deductions with respect to such taxes, subject to certain provisions and
limitations contained in the Code. If more than 50% of the Fund's total assets
at the close of its fiscal year consist of securities of foreign corporations,
the Fund would be eligible and would determine whether or not to file an
election with the Internal Revenue Service pursuant to which shareholders of the
Fund will be required to include their respective pro rata portions of such
withholding taxes in their United States income tax returns as gross income,
treat such respective pro rata portions as taxes paid by them, and deduct such
respective pro rata portions in computing their taxable income or,
alternatively, use them as foreign tax credits
43
<PAGE>
against their United States income taxes. If the Fund does elect to file the
election with the Internal Revenue Service, the Fund will report annually to its
shareholders the amount per share of such withholding.
Special Rules for Certain Foreign Currency Transactions. In general, gains
from foreign currencies and from foreign currency options, foreign currency
futures and forward foreign exchange contracts relating to investments in stock,
securities or foreign currencies are currently considered to be qualifying
income for purposes of determining whether the Fund qualifies as a regulated
investment company. It is currently unclear, however, who will be treated as the
issuer of certain foreign currency instruments or how foreign currency options,
futures, or forward foreign currency contracts will be valued for purposes of
the regulated investment company diversification requirements applicable to the
Fund. The Fund may request a private letter ruling from the Internal Revenue
Service on some or all of these issues.
Under Code Section 988, special rules are provided for certain transactions
in a foreign currency other than the taxpayer's functional currency (I.E.,
unless certain special rules apply, currencies other than the U.S. dollar). In
general, foreign currency gains or losses from forward contracts, from futures
contracts that are not "regulated futures contracts", and from unlisted options
will be treated as ordinary income or loss under Code Section 988. Also, certain
foreign exchange gains or losses derived with respect to foreign fixed-income
securities are also subject to Section 988 treatment. In general, therefore,
Code Section 988 gains or losses will increase or decrease the amount of the
Fund's investment company taxable 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 Code Section 988 losses exceed
other investment company taxable income during a taxable year, the Fund would
not be able to make any ordinary dividend distributions.
If the Fund invests in an entity which is classified as a "passive foreign
investment company" ("PFIC") for U.S. tax purposes, the application of certain
technical tax provisions applying to such companies could result in the
imposition of federal income tax with respect to such investments at the Fund
level which could not be eliminated by distributions to shareholders. The
Taxpayer Relief Act of 1997 establishes a mark-to-market regime which allows
taxpayers investing in PFIC's to avoid most, if not all, of the difficulties
posed by the PFIC rules. In any event, it is not anticipated that any taxes on
the Fund with respect to investments in PFIC's would be significant.
Shareholders are urged to consult their attorney or tax adviser regarding
specific questions as to federal, state or local taxes.
PERFORMANCE INFORMATION
- --------------------------------------------------------------------------------
As discussed in the Prospectus, 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 the Fund's operations, if shorter than
any of the foregoing. The ending redeemable value is reduced by any CDSC at the
end of the one, five or ten year or other period. For the purpose of this
calculation, it is assumed that all dividends and distributions are reinvested.
The formula for computing the average annual total return involves a percentage
obtained by dividing the ending redeemable value by the amount of the initial
investment, taking a root of the quotient (where the root is equivalent to the
number of years in the period) and subtracting 1 from the result. The average
annual total return of Class B for the fiscal year ended November 30, 1997 and
the period October 27, 1995 (commencement of operations) through November 30,
1997 were 4.47% and 17.11%, respectively.
For periods of less than one year, the Fund quotes its total return on a
non-annualized basis. Accordingly, the Fund may compute its aggregate total
return for each of Class A, Class C and Class D
44
<PAGE>
for specified periods by determining the aggregate percentage rate which will
result in the ending value of a hypothetical $1,000 investment made at the
beginning of the period. For the purpose of this calculation, it is assumed that
all dividends and distributions are reinvested. The formula for computing
aggregate total return involves a percentage obtained by dividing the ending
value by the initial $1,000 investment and subtracting 1 from the result. The
ending redeemable value is reduced by any CDSC at the end of the period. Based
on the foregoing calculations, the total returns for the period July 28, 1997
through November 30, 1997 were -5.78%, -1.83% and -0.49% for Class A, Class C
and Class D, respectively.
In addition to the foregoing, the Fund may advertise its total return for
each Class over different periods of time by means of aggregate, average,
year-by-year or other types of total return figures. Such calculations may or
may not reflect imposition of the maximum front-end sales charge for Class A or
the 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 returns of the Fund may be calculated in the manner described above, but
without deduction for any applicable sales charge. Based on this calculation,
total returns of Class B for the fiscal year ended November 30, 1997 and for the
period October 27, 1995 through November 30, 1997 were 9.47% and 18.30%,
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 the 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 for Class B for the fiscal year ended November
30, 1997 and for the period October 27, 1995 through November 30, 1997 were
9.47% and 42.20%, respectively. Based on the foregoing calculations, the total
returns for Class A, Class C and Class D for the period July 28 through November
30, 1997 were -0.56%, -0.84% and -0.49%, 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 total aggregate total return to date (expressed as a decimal and
without taking into account the effect of 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 or $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 (declined) to the following amounts at
November 30, 1997:
<TABLE>
<CAPTION>
INVESTMENT AT INCEPTION OF:
INCEPTION ---------------------------------
CLASS DATE: $10,000 $50,000 $100,000
- --------------------------------------------- ---------- --------- --------- -----------
<S> <C> <C> <C> <C>
Class A 7/28/97 $ 9,422 $ 47,731 $ 96,457
Class B 10/27/95 14,220 71,100 142,200
Class C 7/28/97 9,916 49,580 99,160
Class D 7/28/97 9,951 49,755 99,510
</TABLE>
The Fund from time to time may also advertise its performance relative to
certain performance rankings and indexes compiled by independent organizations
including the Capital Appreciation Lipper Index.
DESCRIPTION OF SHARES
- --------------------------------------------------------------------------------
The shareholders of the Fund are entitled to a full vote for each full share
held. All of the Trustees have been elected by the shareholders of the Fund,
most recently at a Special Meeting of Shareholders held on May 21, 1997. The
Trustees themselves have the power to alter the number and the terms of office
of the Trustees, and they may at any time lengthen their own terms or make their
terms of unlimited
45
<PAGE>
duration and appoint their own successors, provided that always at least a
majority of the Trustees has been elected by the shareholders of the Fund. Under
certain circumstances the Trustees may be removed by action of the Trustees. The
shareholders also have the right to remove the Trustees following a meeting
called for that purpose requested in writing by the record holders of not less
than ten percent of the Fund's outstanding shares. The voting rights of
shareholders are not cumulative, so that holders of more than 50 percent of the
shares voting can, if they choose, elect all Trustees being selected, while the
holders of the remaining shares would be unable to elect any Trustees.
The Declaration of Trust permits the Trustees to authorize the creation of
additional series of shares (the proceeds of which would be invested in
separate, independently managed portfolios) and additional classes of shares
within any series. The Trustees have not presently authorized any such
additional series or classes of shares other than as set forth in the
Prospectus.
The Declaration of Trust provides that no Trustee, officer, employee or
agent of the Fund is liable to the Fund or to a shareholder, nor is any Trustee,
officer, employee or agent liable to any third persons in connection with the
affairs of the Fund, except as such liability may arise from his or her own bad
faith, willful misfeasance, gross negligence, or reckless disregard of his or
her duties. It also provides that all third persons shall look solely to the
Fund's 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 liabilities in connection with the affairs of the Fund.
The Fund is authorized to issue an unlimited number of shares of beneficial
interest. The Fund shall be of unlimited duration subject to the provisions in
the Declaration of Trust concerning termination by action of the shareholders.
CUSTODIAN AND TRANSFER AGENT
- --------------------------------------------------------------------------------
The Bank of New York is the Custodian of the Fund's assets. The Custodian
has contracted with various foreign banks and depositories to hold portfolio
securities of non-U.S. issuers on behalf of the Fund. Any of the Fund's cash
balances with the Custodian in excess of $100,000 are unprotected by federal
deposit insurance. Such balances may, at times, be substantial.
Dean Witter Trust FSB, Harborside Financial Center, Plaza Two, Jersey City,
New Jersey 07311 is the Transfer Agent of the Fund's shares and Dividend
Disbursing Agent for payment of dividends and distributions on Fund shares and
Agent for shareholders under various investment plans described herein. Dean
Witter Trust FSB is an affiliate of Dean Witter InterCapital Inc., the Fund's
Investment Manager, and of Dean Witter Distributors Inc., the Fund's
Distributor. As Transfer Agent and Dividend Disbursing Agent, Dean Witter Trust
FSB's responsibilities include maintaining shareholder accounts, disbursing cash
dividends and reinvesting dividends, processing account registration changes,
handling purchase and redemption transactions, mailing prospectuses and reports,
mailing and tabulating proxies, processing share certificate transactions, and
maintaining shareholder records and lists. For these services Dean Witter Trust
FSB receives a per shareholder account fee.
INDEPENDENT ACCOUNTANTS
- --------------------------------------------------------------------------------
Price Waterhouse LLP serves as the independent accountants of the Fund. The
independent accountants are responsible for auditing the annual financial
statements of the Fund.
REPORTS TO SHAREHOLDERS
- --------------------------------------------------------------------------------
The Fund will send to shareholders, at least semi-annually, reports showing
the Fund's portfolio and other information. An annual report containing
financial statements audited by independent accountants will be sent to
shareholders each year.
46
<PAGE>
The Fund's fiscal year ends on November 30. The financial statements of the
Fund must be audited at least once a year by independent accountants whose
selection is made annually by the Fund's Board of Trustees.
LEGAL COUNSEL
- --------------------------------------------------------------------------------
Barry Fink, Esq., who is an officer and the General Counsel of the
Investment Manager, is an officer and the General Counsel of the Fund.
EXPERTS
- --------------------------------------------------------------------------------
The financial statements of the Fund for the year ended November 30, 1997
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 Price Waterhouse LLP, independent accountants, given on the
authority of said firm as experts in auditing and accounting.
REGISTRATION STATEMENT
- --------------------------------------------------------------------------------
This Statement of Additional Information and the Prospectus do not contain
all of the information set forth in the Registration Statement the Fund has
filed with the Securities and Exchange Commission. The complete Registration
Statement may be obtained from the Securities and Exchange Commission upon
payment of the fee prescribed by the rules and regulations of the Commission.
47
<PAGE>
DEAN WITTER CAPITAL APPRECIATION FUND
PORTFOLIO OF INVESTMENTS November 30, 1997
<TABLE>
<CAPTION>
NUMBER OF
SHARES VALUE
- ----------------------------------------------------------------------------------------------------------------
<C> <S> <C>
COMMON STOCKS (100.2%)
Advertising (0.1%)
25,000 TMP Worldwide, Inc.*................................................................... $ 453,125
------------
Aerospace & Defense (0.9%)
100,000 Kellstrom Industries, Inc.*............................................................ 2,612,500
30,000 Orbital Sciences Corp.*................................................................ 768,750
------------
3,381,250
------------
Agriculture (0.1%)
20,000 Scheid Vineyards Inc. (Class A)*....................................................... 200,000
------------
Agriculture Related (0.3%)
50,000 Agribiotech, Inc.*..................................................................... 493,750
100,000 Cadiz Land Company, Inc.*.............................................................. 718,750
------------
1,212,500
------------
Asset Management (0.0%)
5,000 MAXIMUS, Inc.*......................................................................... 120,625
------------
Automotive (0.4%)
28,900 Avis Rent-A-Car, Inc.*................................................................. 969,956
31,600 Group 1 Automotive, Inc.*.............................................................. 306,125
------------
1,276,081
------------
Banking (0.0%)
5,000 Net.B@nk, Inc.*........................................................................ 55,625
------------
Biotechnology (0.9%)
30,000 ESC Medical Systems Ltd. (Israel)*..................................................... 1,072,500
70,000 Osteotech, Inc.*....................................................................... 2,108,750
------------
3,181,250
------------
Building & Construction (0.4%)
40,000 Dycom Industries, Inc.*................................................................ 900,000
20,000 Hospitality Worldwide Services, Inc.*.................................................. 240,000
15,000 Schuff Steel Co.*...................................................................... 165,000
900 UNIFAB International, Inc.*............................................................ 18,000
------------
1,323,000
------------
Business Services (0.2%)
30,000 Wackenhut Corrections Corp.*........................................................... 840,000
------------
Cement (0.5%)
80,000 Giant Cement Holding, Inc.*............................................................ 1,930,000
------------
Chemicals - Specialty (0.1%)
60,000 Eco Soil Systems, Inc.*................................................................ 337,500
------------
<CAPTION>
NUMBER OF
SHARES VALUE
- ----------------------------------------------------------------------------------------------------------------
<C> <S> <C>
Commercial Services (5.2%)
80,000 Actrade International, Ltd.*........................................................... $ 2,290,000
30,000 Administaff, Inc.*..................................................................... 667,500
60,000 Billing Information Concepts Corp.*.................................................... 2,670,000
50,000 Caribiner International, Inc.*......................................................... 2,121,875
50,000 Claremont Technology Group, Inc.*...................................................... 900,000
50,000 Complete Management, Inc.*............................................................. 831,250
30,000 Crescent Operating, Inc.*.............................................................. 498,750
50,000 Grow Biz International, Inc.*.......................................................... 600,000
30,000 International Total Services, Inc.*.................................................... 461,250
30,000 Lason Holdings, Inc.*.................................................................. 836,250
10,000 Market Facts Inc.*..................................................................... 176,250
65,000 May & Speh, Inc.*...................................................................... 861,250
5,300 Metro Information Services, Inc.*...................................................... 135,150
30,000 Personnel Group of America, Inc.*...................................................... 1,096,875
50,000 Primark Corp.*......................................................................... 1,693,750
80,000 ProSoft I-Net Solutions Inc.*.......................................................... 890,000
40,000 Quebecor Printing, Inc. (Canada)....................................................... 573,114
50,000 Superior Services, Inc.*............................................................... 1,168,750
30,000 Vestcom International, Inc.*........................................................... 592,500
------------
19,064,514
------------
Communications - Equipment & Software (0.2%)
30,000 EXCEL Communications, Inc.*............................................................ 705,000
------------
Communications - Equipment/Manufacturers (0.3%)
30,000 Bay Networks, Inc.*.................................................................... 901,875
------------
Computer Equipment (0.8%)
30,000 Kemet Corp.*........................................................................... 708,750
45,000 RADCOM Ltd.*........................................................................... 348,750
60,000 Splash Technology Holdings, Inc.*...................................................... 1,920,000
------------
2,977,500
------------
Computer Services (1.0%)
80,000 CheckFree Corp.*....................................................................... 2,085,000
30,000 Data Systems Network Corp.*............................................................ 345,000
40,000 Procom Technology, Inc.*............................................................... 615,000
40,000 SPR Inc.*.............................................................................. 635,000
------------
3,680,000
------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
48
<PAGE>
DEAN WITTER CAPITAL APPRECIATION FUND
PORTFOLIO OF INVESTMENTS November 30, 1997, Continued
<TABLE>
<CAPTION>
NUMBER OF
SHARES VALUE
- ----------------------------------------------------------------------------------------------------------------
<C> <S> <C>
Computer Software (9.5%)
25,000 Advantage Learning Systems, Inc.*...................................................... $ 568,750
60,000 Aladdin Knowledge Systems Ltd. (Israel)*............................................... 900,000
100,000 Borland International, Inc.*........................................................... 1,000,000
24,000 Box Hill Systems Corp.*................................................................ 280,500
50,000 Business Objects S.A. (ADR) (France)*.................................................. 537,500
100,000 Compuware Corp.*....................................................................... 3,493,750
80,000 CyberMedia, Inc.*...................................................................... 1,800,000
100,000 Data Dimensions, Inc.*................................................................. 1,806,250
50,000 DataMirror Corp. (Canada)*............................................................. 458,281
100,000 Digi International Inc.*............................................................... 1,937,500
60,000 Dr. Solomon's Group PLC (ADR) (United Kingdom)*........................................ 2,085,000
3,000 Great Plains Software, Inc.*........................................................... 67,500
50,000 International Microcomputer Software, Inc.*............................................ 787,500
60,000 INTERSOLV, Inc.*....................................................................... 956,250
50,000 InterVU Inc.*.......................................................................... 493,750
5,400 J.D. Edwards & Co.*.................................................................... 184,275
50,000 Kofax Image Products, Inc.*............................................................ 425,000
50,000 Landmark Systems Corp.*................................................................ 350,000
30,000 Learning Company, Inc.*................................................................ 543,750
50,000 LGS Group Inc. (Canada)................................................................ 570,656
40,000 MetaCreations Corp.*................................................................... 475,000
3,600 MMC Networks Inc.*..................................................................... 62,325
14,200 New Era of Networks, Inc.*............................................................. 181,050
40,000 Open Text Corp. (Canada)*.............................................................. 377,500
50,000 Oshap Technologies, Ltd. (Israel)*..................................................... 434,375
30,000 Pairgain Technologies, Inc.*........................................................... 706,875
30,000 Peregrine Systems, Inc.*............................................................... 356,250
20,000 Platinum Technology, Inc.*............................................................. 520,000
12,000 QAD Inc.*.............................................................................. 189,750
30,000 Rainbow Technologies, Inc.*............................................................ 720,000
25,000 RealNetworks, Inc.*.................................................................... 382,812
110,000 Sapiens International Corp. (Israel)*.................................................. 825,000
90,000 Simulation Sciences, Inc.*............................................................. 1,620,000
70,000 Symantec Corp.*........................................................................ 1,750,000
30,000 Symix Systems, Inc.*................................................................... 442,500
130,000 System Software Associates, Inc.*...................................................... 1,755,000
100,000 Systems & Computer Technology Corp.*................................................... 4,650,000
31,000 TSI International Software Ltd.*....................................................... 310,000
------------
35,004,649
------------
<CAPTION>
NUMBER OF
SHARES VALUE
- ----------------------------------------------------------------------------------------------------------------
<C> <S> <C>
Computer Software & Services (8.6%)
80,000 Analysts International Corp............................................................ $ 3,780,000
30,000 CCC Information Services Group, Inc.*.................................................. 555,000
30,000 Certicom Corp. (Canada)*............................................................... 821,745
40,000 Check Point Software Technologies Ltd. (Israel)*....................................... 1,805,000
40,000 Cylink Corp.*.......................................................................... 440,000
30,000 Documentum, Inc.*...................................................................... 922,500
50,000 Edify Corp.*........................................................................... 837,500
45,000 Harbinger Corp.*....................................................................... 1,350,000
90,000 Hyperion Software Corp.*............................................................... 3,875,625
50,000 I2 Technologies, Inc.*................................................................. 2,256,250
30,000 IDT Corp.*............................................................................. 645,000
50,000 Infoseek Corp.*........................................................................ 553,125
30,000 JetForm Corp.*......................................................................... 459,375
50,000 Keane, Inc.*........................................................................... 1,584,375
80,000 Legato Systems, Inc.*.................................................................. 3,040,000
70,000 Lycos, Inc.*........................................................................... 2,135,000
50,000 Netopia, Inc.*......................................................................... 325,000
40,000 Olicom A/S (Denmark)*.................................................................. 1,147,500
60,000 PRI Automation, Inc.*.................................................................. 2,040,000
40,000 Secure Computing Corp.*................................................................ 475,000
90,000 Versant Object Technology Corp.*....................................................... 1,333,125
60,000 Xylan Corp.*........................................................................... 1,226,250
------------
31,607,370
------------
Computers (1.2%)
30,000 Lexmark International Group, Inc. (Class A)*........................................... 956,250
40,000 MICROS Systems, Inc.*.................................................................. 2,075,000
30,000 Network Appliance, Inc.*............................................................... 1,511,250
------------
4,542,500
------------
Computers - Systems (0.8%)
76,113 ATL Products, Inc.*.................................................................... 861,028
60,000 Tera Computer Co.*..................................................................... 900,000
60,000 Unisys Corp.*.......................................................................... 858,750
20,000 Video Lottery Technologies, Inc.*...................................................... 227,500
------------
2,847,278
------------
Consumer Products (0.2%)
30,000 Consolidated Cigar Holdings Inc. (Class A)*............................................ 826,875
------------
Consumer Services (1.1%)
60,000 AccuStaff, Inc.*....................................................................... 1,773,750
70,000 AmeriTrade Holding Corp. (Class A)*.................................................... 2,345,000
------------
4,118,750
------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
49
<PAGE>
DEAN WITTER CAPITAL APPRECIATION FUND
PORTFOLIO OF INVESTMENTS November 30, 1997, Continued
<TABLE>
<CAPTION>
NUMBER OF
SHARES VALUE
- ----------------------------------------------------------------------------------------------------------------
<C> <S> <C>
Data Processing (0.4%)
20,000 Choicepoint Inc.*...................................................................... $ 701,250
100,000 Object Design, Inc.*................................................................... 937,500
------------
1,638,750
------------
Distribution (0.5%)
5,800 JLK Direct Distribution Inc. (Class A)*................................................ 164,937
60,000 VWR Scientific Products Corp.*......................................................... 1,593,749
------------
1,758,686
------------
Drugs (0.5%)
50,000 IDEC Pharmaceuticals Corp.*............................................................ 1,746,875
------------
Education (0.5%)
10,100 Bright Horizons, Inc.*................................................................. 156,550
82,700 Cornell Corrections, Inc.*............................................................. 1,447,250
13,000 Education Management Corp.*............................................................ 324,187
------------
1,927,987
------------
Electronic Components (2.1%)
30,000 ATMI Inc.*............................................................................. 963,750
60,000 DII Group, Inc.*....................................................................... 1,342,500
40,000 DSP Communications, Inc.*.............................................................. 640,000
78,100 EFTC Corp.*............................................................................ 1,161,737
30,000 Exar Corp.*............................................................................ 746,250
19,600 FARO Technologies, Inc.*............................................................... 240,100
40,000 GenRad, Inc.*.......................................................................... 1,062,500
30,000 Ramtron International Corp.*........................................................... 193,125
60,000 Windmere-Durable Holdings Inc.......................................................... 1,447,500
------------
7,797,462
------------
Electronics (3.7%)
40,000 Aeroflex Inc.*......................................................................... 342,500
60,000 Analog Devices, Inc.*.................................................................. 1,882,500
19,000 Anaren Microwave, Inc.*................................................................ 380,000
110,000 Creative Technology Ltd. (Singapore)*.................................................. 2,928,750
30,000 DSP Group, Inc.*....................................................................... 975,000
40,000 Faroudja, Inc.*........................................................................ 275,000
20,000 Flextronics International, Ltd.*....................................................... 800,000
110,000 Kopin Corp.*........................................................................... 2,310,000
100,000 Odetics, Inc. (Class A)*............................................................... 662,500
8,700 OSI Systems, Inc.*..................................................................... 113,100
30,000 Ultratech Stepper, Inc.*............................................................... 731,250
50,000 Vitesse Semiconductor Corp.*........................................................... 2,225,000
------------
13,625,600
------------
<CAPTION>
NUMBER OF
SHARES VALUE
- ----------------------------------------------------------------------------------------------------------------
<C> <S> <C>
Electronics & Electrical (0.3%)
35,000 Teradyne, Inc.*........................................................................ $ 1,148,437
------------
Electronics - Semiconductors (0.7%)
90,000 MRV Communications, Inc.*.............................................................. 2,520,000
------------
Electronics - Semiconductors/Components (1.0%)
60,000 Kulicke & Soffa Industries, Inc.*...................................................... 1,653,750
60,000 Leitch Technology Corp. (Canada)*...................................................... 1,580,278
30,000 Supertex, Inc.*........................................................................ 367,500
------------
3,601,528
------------
Energy (0.6%)
30,000 Global Marine, Inc.*................................................................... 789,375
80,000 KTI, Inc.*............................................................................. 1,270,000
------------
2,059,375
------------
Entertainment (0.0%)
9,600 N2K Inc.*.............................................................................. 177,600
------------
Environmental (0.6%)
60,000 Allied Waste Industries, Inc.*......................................................... 1,308,750
90,000 ITEQ, Inc.*............................................................................ 1,057,500
------------
2,366,250
------------
Environmental control (0.8%)
90,000 U.S.A Waste Services, Inc.*............................................................ 2,975,625
------------
Equipment (0.4%)
30,000 EVI, Inc.*............................................................................. 1,543,125
------------
Finance (0.5%)
50,000 Franchise Mortgage Acceptance Co.*..................................................... 875,000
76,500 New Century Financial Corp.*........................................................... 1,004,062
------------
1,879,062
------------
Financial Services (0.2%)
30,000 Doral Financial Corp................................................................... 641,250
------------
Food Processing (0.3%)
30,000 Smithfield Foods, Inc.*................................................................ 1,057,500
------------
Foods (0.2%)
40,000 Foodmaker, Inc.*....................................................................... 620,000
------------
Furniture (0.2%)
25,900 Knoll, Inc.*........................................................................... 780,238
------------
Health & Personal Care (0.5%)
109,000 Assisted Living Concepts, Inc.*........................................................ 1,866,625
------------
Healthcare (0.2%)
60,000 Bone Care International, Inc.*......................................................... 600,000
------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
50
<PAGE>
DEAN WITTER CAPITAL APPRECIATION FUND
PORTFOLIO OF INVESTMENTS November 30, 1997, Continued
<TABLE>
<CAPTION>
NUMBER OF
SHARES VALUE
- ----------------------------------------------------------------------------------------------------------------
<C> <S> <C>
Healthcare - Diversified (0.5%)
30,000 Healthsouth Corp.*..................................................................... $ 787,500
23,460 Paragon Health Network, Inc.*.......................................................... 1,216,988
------------
2,004,488
------------
Healthcare - HMOs (0.2%)
60,000 Specialty Care Network, Inc.*.......................................................... 742,500
------------
Home Building (0.2%)
40,000 Kaufman & Broad Home Corp.............................................................. 867,500
------------
Hotels/Motels (0.1%)
31,600 Execustay Corp.*....................................................................... 300,200
------------
Household Products (0.1%)
10,000 Dial Corp.............................................................................. 193,750
------------
Internet (0.4%)
18,000 Concentric Network Corp.*.............................................................. 180,000
30,000 Excite, Inc.*.......................................................................... 768,750
8,100 Network Solutions, Inc. (Class A)*..................................................... 128,588
35,000 Preview Travel, Inc.*.................................................................. 319,375
------------
1,396,713
------------
Investment Companies (0.4%)
22,400 Affiliated Managers Group, Inc.*....................................................... 560,000
45,000 Consolidated Capital Corp.*............................................................ 922,500
------------
1,482,500
------------
Leisure (1.1%)
40,000 American Coin Merchandising, Inc.*..................................................... 675,000
28,900 Brass Eagle Inc.*...................................................................... 334,156
30,000 Signature Resorts, Inc.*............................................................... 806,250
39,000 Silverleaf Resorts, Inc.*.............................................................. 809,250
34,500 Trendwest Resorts, Inc.*............................................................... 845,250
20,000 Vistana, Inc.*......................................................................... 440,000
------------
3,909,906
------------
Machinery (2.1%)
110,000 Chart Industries, Inc.................................................................. 2,543,750
40,000 MagneTek, Inc.*........................................................................ 835,000
140,000 National-Oilwell, Inc.*................................................................ 4,436,250
------------
7,815,000
------------
Machinery - Diversified (0.3%)
50,400 Advanced Energy Industries, Inc.*...................................................... 989,100
------------
<CAPTION>
NUMBER OF
SHARES VALUE
- ----------------------------------------------------------------------------------------------------------------
<C> <S> <C>
Manufacturing (0.8%)
110,000 General Scanning, Inc.*................................................................ $ 2,860,000
------------
Manufacturing - Diversified (0.5%)
30,000 Griffon Corp.*......................................................................... 466,875
30,000 Mettler-Toledo International Inc.*..................................................... 536,250
35,000 Middleby Corp.*........................................................................ 354,375
40,000 Safety Components International, Inc.*................................................. 540,000
------------
1,897,500
------------
Medical Products & Supplies (1.1%)
30,000 Health Care & Retirement Corp.*........................................................ 1,181,250
100,000 Molecular Dynamics, Inc.*.............................................................. 2,012,500
60,000 Optical Coating Laboratory, Inc........................................................ 900,000
------------
4,093,750
------------
Medical Services (0.1%)
50,000 Medical Resources, Inc.*............................................................... 450,000
------------
Metals & Mining (0.0%)
1,000 BRO-X Minerals Ltd. (Canada)*.......................................................... 492
------------
Metals - Miscellaneous (0.4%)
50,000 Handy & Harman......................................................................... 1,118,750
60,000 Recycling Industries, Inc.*............................................................ 465,000
------------
1,583,750
------------
Metals Non-Ferrous (0.5%)
90,000 Tubos de Acero de Mexico S.A. (ADR) (Mexico)*.......................................... 1,991,250
------------
Miscellaneous (2.5%)
60,000 Brunswick Technologies, Inc.*.......................................................... 1,027,500
90,000 Mail-Well, Inc.*....................................................................... 2,936,250
120,000 Maverick Tube Corp.*................................................................... 3,427,500
70,000 Royal Group Technologies Ltd. (Canada)*................................................ 1,684,375
------------
9,075,625
------------
Natural Gas - Exploration & Production (0.7%)
120,000 Gulf Island Fabrication, Inc.*......................................................... 2,640,000
------------
Office Equipment & Supplies (0.1%)
30,000 Corporate Express, Inc.*............................................................... 468,750
------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
51
<PAGE>
DEAN WITTER CAPITAL APPRECIATION FUND
PORTFOLIO OF INVESTMENTS November 30, 1997, Continued
<TABLE>
<CAPTION>
NUMBER OF
SHARES VALUE
- ----------------------------------------------------------------------------------------------------------------
<C> <S> <C>
Oil & Gas (4.8%)
17,700 Bayard Drilling Technologies, Inc.*.................................................... $ 325,238
90,000 Clayton Williams Energy, Inc.*......................................................... 1,417,500
60,000 Comstock Resources, Inc.*.............................................................. 787,500
30,000 Cross Timbers Oil Co................................................................... 695,625
30,000 Dailey International Inc.*............................................................. 333,750
15,000 Dawson Geophysical Co.*................................................................ 285,000
39,700 Gulf Indonesia Resources Ltd.*......................................................... 895,731
50,000 KCS Energy, Inc........................................................................ 1,187,500
45,000 Lomak Petroleum, Inc................................................................... 781,875
60,000 Mallon Resources Corp.*................................................................ 592,500
120,000 Noble Drilling Corp.*.................................................................. 3,607,500
100,000 Patterson Energy, Inc.*................................................................ 3,637,500
50,000 St. Mary Land & Exploration Co......................................................... 2,043,750
100,000 Unit Corp.*............................................................................ 1,093,750
------------
17,684,719
------------
Oil - Domestic (0.2%)
30,000 Snyder Oil Corp........................................................................ 596,250
------------
Oil - Exploration & Production (0.1%)
15,000 Brown (TOM), Inc.*..................................................................... 328,125
------------
Oil Equipment & Services (1.7%)
3,000 Dril-Quip, Inc.*....................................................................... 89,813
100,000 ENSCO International, Inc............................................................... 3,575,000
120,000 Global Industries Ltd.*................................................................ 1,920,000
22,100 IRI International Corp.*............................................................... 356,363
10,000 Wiser Oil Co........................................................................... 152,500
------------
6,093,676
------------
Oil Refineries (0.5%)
60,000 Valero Energy Corp..................................................................... 1,882,500
------------
Oil Related (0.4%)
35,000 Veritas DGC Inc.*...................................................................... 1,400,000
------------
Oil Services (1.5%)
97,500 Core Laboratories N.V.*................................................................ 3,510,000
40,000 Friede Goldman International Inc.*..................................................... 1,187,500
25,000 Superior Energy Services, Inc.*........................................................ 262,500
20,000 UTI Energy Corp.*...................................................................... 560,000
------------
5,520,000
------------
Oil Well Equipment & Service (0.2%)
30,000 Key Energy Group, Inc.*................................................................ 729,375
------------
<CAPTION>
NUMBER OF
SHARES VALUE
- ----------------------------------------------------------------------------------------------------------------
<C> <S> <C>
Pharmaceuticals (2.3%)
100,000 Advance Paradigm, Inc.*................................................................ $ 2,962,500
5,000 Algos Pharmaceutical Corp.*............................................................ 127,500
30,000 Emisphere Technologies, Inc.*.......................................................... 603,750
40,000 MedImmune, Inc.*....................................................................... 1,517,500
30,000 PathoGenesis Corp.*.................................................................... 1,065,000
60,000 SangStat Medical Corp.*................................................................ 2,055,000
------------
8,331,250
------------
Pollution Control (0.8%)
80,000 American Disposal Services, Inc.*...................................................... 2,820,000
------------
Property - Casualty Insurance (0.4%)
5,000 Penn-America Group, Inc................................................................ 91,250
30,000 Stewart Information Services Corp...................................................... 811,875
30,000 Symons International Group, Inc.*...................................................... 558,750
------------
1,461,875
------------
Publishing (1.0%)
9,200 CMP Media Inc. (Class A)*.............................................................. 169,050
5,000 Petersen Companies, Inc. (Class A)*.................................................... 90,000
30,000 Thomson Corp. (Canada)................................................................. 759,587
90,000 Valassis Communications, Inc.*......................................................... 2,705,625
------------
3,724,262
------------
Real Estate (0.3%)
50,000 Catellus Development Corp.*............................................................ 925,000
2,000 LaSalle Partners, Inc.*................................................................ 69,375
------------
994,375
------------
Real Estate Investment Trust (0.2%)
40,000 Laser Mortgage Management, Inc......................................................... 590,000
------------
Restaurants (0.1%)
28,000 Star Buffet, Inc.*..................................................................... 364,000
------------
Retail (2.7%)
19,900 A. C. Moore Arts & Crafts, Inc.*....................................................... 296,013
30,000 Abercrombie & Fitch Co. (Class A)*..................................................... 898,125
60,000 Claire's Stores, Inc................................................................... 1,357,500
60,000 Fred's, Inc............................................................................ 1,462,500
80,000 Michaels Stores, Inc.*................................................................. 2,565,000
60,000 ONSALE, Inc.*.......................................................................... 1,053,750
60,000 Ross Stores, Inc....................................................................... 2,340,000
------------
9,972,888
------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
52
<PAGE>
DEAN WITTER CAPITAL APPRECIATION FUND
PORTFOLIO OF INVESTMENTS November 30, 1997, Continued
<TABLE>
<CAPTION>
NUMBER OF
SHARES VALUE
- ----------------------------------------------------------------------------------------------------------------
<C> <S> <C>
Retail - Department Stores (1.8%)
75,000 Dollar General Corp.................................................................... $ 2,821,875
60,000 Payless ShoeSource, Inc.*.............................................................. 3,810,000
------------
6,631,875
------------
Retail - Specialty (0.8%)
100,000 Braun's Fashions Corp.*................................................................ 950,000
60,000 TJX Companies, Inc..................................................................... 2,070,000
------------
3,020,000
------------
Retail - Specialty Apparel (0.6%)
60,000 Dress Barn, Inc.*...................................................................... 1,545,000
30,000 Vans, Inc.*............................................................................ 481,875
------------
2,026,875
------------
Semiconductors (1.1%)
50,000 Integrated Circuit Systems, Inc.*...................................................... 1,400,000
60,000 KLA-Tencor Corp.*...................................................................... 2,317,500
55,000 Plasma-Therm, Inc.*.................................................................... 460,625
------------
4,178,125
------------
Specialized Services (1.4%)
10,800 Pegasus Systems, Inc.*................................................................. 190,350
30,000 RCM Technologies, Inc.*................................................................ 468,750
3,900 Securacom, Inc.*....................................................................... 40,463
30,000 Select Appointments Holdings Public Limited Co. (ADR) (United Kingdom)................. 577,500
50,000 SOS Staffing Services, Inc.*........................................................... 1,025,000
45,000 Source Services Corp.*................................................................. 922,500
30,000 Todd-AO Corp. (Class A)................................................................ 292,500
8,200 TransCoastal Marine Services, Inc.*.................................................... 159,900
70,000 Transcrypt International, Inc.*........................................................ 1,636,250
------------
5,313,213
------------
Steel (0.8%)
30,000 Lone Star Technologies, Inc.*.......................................................... 870,000
60,000 Northwest Pipe Co.*.................................................................... 1,357,500
30,000 NS Group, Inc.*........................................................................ 562,500
------------
2,790,000
------------
Technology (1.7%)
40,000 Aerial Communications, Inc.*........................................................... 355,000
60,000 Brilliant Digital Entertainment, Inc.*................................................. 360,000
60,000 CIENA Corp.*........................................................................... 3,251,250
60,000 Kuhlman Corp........................................................................... 2,118,750
3,600 LHS Group, Inc.*....................................................................... 151,200
------------
6,236,200
------------
<CAPTION>
NUMBER OF
SHARES VALUE
- ----------------------------------------------------------------------------------------------------------------
<C> <S> <C>
Technology Related (0.5%)
130,000 Graham-Field Health Products, Inc.*.................................................... $ 1,941,875
------------
Telecommunications (4.4%)
50,000 ARC International Corp.*............................................................... 290,625
70,000 CGI Group, Inc. (Canada)*.............................................................. 1,976,401
30,000 CTC Communications Corp.*.............................................................. 442,500
30,000 Globalstar Telecommunications Ltd.*.................................................... 1,486,875
110,000 Inter-Tel Corp......................................................................... 2,310,000
30,000 Norstan, Inc.*......................................................................... 712,500
60,000 Orckit Communications Ltd. (Israel)*................................................... 1,230,000
20,000 PageMart Wireless, Inc.*............................................................... 197,500
19,100 Qwest Communications International Inc.*............................................... 1,040,950
30,000 STAR Telecommunications, Inc.*......................................................... 858,750
40,000 Tel-Save Holdings, Inc.*............................................................... 862,500
90,000 Winstar Communications, Inc.*.......................................................... 2,379,375
100,000 World Access, Inc.*.................................................................... 2,425,000
------------
16,212,976
------------
Telecommunications Equipment (4.5%)
30,000 ACE COMM Corp.*........................................................................ 495,000
90,000 Applied Signal Technology, Inc.*....................................................... 1,350,000
40,000 Associated Group, Inc. - Class B*...................................................... 1,250,000
50,000 Boston Communications Group, Inc.*..................................................... 462,500
30,000 Communications Systems, Inc............................................................ 540,000
100,000 Davox Corp.*........................................................................... 3,225,000
180,000 Digital Microwave Corp.*............................................................... 2,835,000
2,000 Excel Switching Corp.*................................................................. 48,250
60,000 Mitec Telecom Inc. (Canada)*........................................................... 326,591
70,000 NICE-Systems Ltd. (ADR) (Israel)*...................................................... 3,062,500
30,000 Ortel Corp.*........................................................................... 528,750
110,000 RIT Technologies Ltd.*................................................................. 1,086,250
30,000 ViaSat, Inc.*.......................................................................... 457,500
30,000 Yurie Systems, Inc.*................................................................... 742,500
------------
16,409,841
------------
Temporary Services (0.5%)
80,000 Labor Ready Inc.*...................................................................... 1,780,000
------------
Transportation (3.7%)
75,000 Air Express International Corp......................................................... 2,151,563
60,000 Alaska Air Group, Inc.*................................................................ 2,242,500
50,000 American Classic Voyages Co.*.......................................................... 850,000
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
53
<PAGE>
DEAN WITTER CAPITAL APPRECIATION FUND
PORTFOLIO OF INVESTMENTS NOVEMBER 30, 1997, CONTINUED
<TABLE>
<CAPTION>
NUMBER OF
SHARES VALUE
- ----------------------------------------------------------------------------------------------------------------
<C> <S> <C>
44,700 Budget Group, Inc. (Class A)*.......................................................... $ 1,586,850
30,000 Coach USA, Inc.*....................................................................... 836,250
70,000 Consolidated Freightways Corp.*........................................................ 1,093,750
11,600 Jevic Transportation, Inc.*............................................................ 189,950
70,000 Offshore Logistics, Inc.*.............................................................. 1,601,250
120,000 Transat A.T., Inc. (Canada)*........................................................... 1,011,378
45,000 Trico Marine Service, Inc.*............................................................ 1,254,375
10,000 Virgin Express Holdings PLC - SP (ADR) (United Kingdom)*............................... 165,000
30,000 Werner Enterprises, Inc................................................................ 641,250
------------
13,624,116
------------
Transportation - Shipping (0.4%)
30,000 Gulfmark Offshore Inc.*................................................................ 1,005,000
50,000 OMI Corp.*............................................................................. 512,500
------------
1,517,500
------------
Truckers (0.5%)
40,000 CNF Transportation Inc................................................................. 1,740,000
------------
Waste Disposal (0.5%)
80,000 Eastern Environmental Services, Inc.*.................................................. 1,880,000
------------
Wholesale Distributor (0.6%)
60,000 Brightpoint, Inc.*..................................................................... 963,750
50,000 CellStar Corp.*........................................................................ 1,293,750
------------
2,257,500
------------
Wireless Communication (0.1%)
30,000 Metro One Telecommunications*.......................................................... 247,500
------------
TOTAL COMMON STOCKS
(Identified Cost $320,804,094)......................................................... 367,982,907
------------
PREFERRED STOCK (0.0%)
Medical Products & Supplies
30,000 Fresenius National Medical Care (Class D) (Germany) (Identified Cost $6,069)*.......... 1,950
------------
</TABLE>
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT IN
THOUSANDS VALUE
- ----------------------------------------------------------------------------------------------------------------
<C> <S> <C>
SHORT-TERM INVESTMENT (a) (0.7%)
REPURCHASE AGREEMENT
$ 2,447 The Bank of New York 5.375% due 12/01/97 (dated 11/28/97; proceeds $2,447,971)
(Identified Cost $2,446,890)......................................................... $ 2,446,890
------------
</TABLE>
<TABLE>
<S> <C> <C>
TOTAL INVESTMENTS
(Identified Cost $323,257,053) (B)........................................................ 100.9 % 370,431,747
LIABILITIES IN EXCESS OF CASH AND OTHER ASSETS............................................ (0.9) (3,179,883)
------ -------------
NET ASSETS................................................................................ 100.0 % $ 367,251,864
------ -------------
------ -------------
</TABLE>
- ---------------------
ADR American Depository Receipt.
* Non-income producing security.
(a) Collateralized by $842,747 Government National Mortgage Association 7.00%
due 09/20/24 valued at $519,347 and $1,843,626 Government National Mortgage
Association 9.00% due 11/15/27 valued at $1,976,481.
(b) The aggregate cost for federal income tax purposes approximates identified
cost. The aggregate gross unrealized appreciation is $62,429,313 and the
aggregate gross unrealized depreciation is $15,254,619, resulting in net
unrealized appreciation of $47,174,694.
SEE NOTES TO FINANCIAL STATEMENTS
54
<PAGE>
DEAN WITTER CAPITAL APPRECIATION FUND
FINANCIAL STATEMENTS
STATEMENT OF ASSETS AND LIABILITIES
November 30, 1997
<TABLE>
<S> <C>
ASSETS:
Investments in securities, at value
(identified cost $323,257,053).............................................................. $370,431,747
Cash.......................................................................................... 3,740
Receivable for:
Investments sold.......................................................................... 3,064,024
Shares of beneficial interest sold........................................................ 370,989
Dividends................................................................................. 28,770
Deferred organizational expenses.............................................................. 103,962
Prepaid expenses.............................................................................. 86,388
------------
TOTAL ASSETS............................................................................. 374,089,620
------------
LIABILITIES:
Payable for:
Investments purchased..................................................................... 6,181,443
Plan of distribution fee.................................................................. 312,445
Investment management fee................................................................. 234,571
Shares of beneficial interest repurchased................................................. 31,535
Accrued expenses.............................................................................. 77,762
------------
TOTAL LIABILITIES........................................................................ 6,837,756
------------
NET ASSETS............................................................................... $367,251,864
------------
------------
COMPOSITION OF NET ASSETS:
Paid-in-capital............................................................................... $298,208,563
Net unrealized appreciation................................................................... 47,174,694
Accumulated undistributed net realized gain................................................... 21,868,607
------------
NET ASSETS............................................................................... $367,251,864
------------
------------
CLASS A SHARES:
Net Assets.................................................................................... $344,785
Shares Outstanding (unlimited authorized, $.01 par value)..................................... 24,184
NET ASSET VALUE PER SHARE................................................................ $14.26
------------
------------
MAXIMUM OFFERING PRICE PER SHARE
(net asset value plus 5.54% of net asset value)........................................ $15.05
------------
------------
CLASS B SHARES:
Net Assets.................................................................................... $365,483,520
Shares Outstanding (unlimited authorized, $.01 par value)..................................... 25,703,352
NET ASSET VALUE PER SHARE................................................................ $14.22
------------
------------
CLASS C SHARES:
Net Assets.................................................................................... $1,287,861
Shares Outstanding (unlimited authorized, $.01 par value)..................................... 90,559
NET ASSET VALUE PER SHARE................................................................ $14.22
------------
------------
CLASS D SHARES:
Net Assets.................................................................................... $135,698
Shares Outstanding (unlimited authorized, $.01 par value)..................................... 9,511
NET ASSET VALUE PER SHARE................................................................ $14.27
------------
------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
55
<PAGE>
DEAN WITTER CAPITAL APPRECIATION FUND
FINANCIAL STATEMENTS, continued
STATEMENT OF OPERATIONS
For the year ended November 30, 1997*
<TABLE>
<CAPTION>
<S> <C>
NET INVESTMENT INCOME:
INCOME
Dividends (net of $3,705 foreign withholding tax).............................................. $ 505,611
Interest....................................................................................... 215,588
-----------
TOTAL INCOME.............................................................................. 721,199
-----------
EXPENSES
Plan of distribution fee (Class A shares)...................................................... 197
Plan of distribution fee (Class B shares)...................................................... 3,434,993
Plan of distribution fee (Class C shares)...................................................... 2,400
Investment management fee...................................................................... 2,578,896
Transfer agent fees and expenses............................................................... 559,409
Registration fees.............................................................................. 70,436
Shareholder reports and notices................................................................ 67,583
Custodian fees................................................................................. 56,761
Professional fees.............................................................................. 51,873
Organizational expenses........................................................................ 35,763
Trustees' fees and expenses.................................................................... 9,206
Other.......................................................................................... 6,743
-----------
TOTAL EXPENSES............................................................................ 6,874,260
-----------
NET INVESTMENT LOSS....................................................................... (6,153,061)
-----------
NET REALIZED AND UNREALIZED GAIN (LOSS):
Net realized gain.............................................................................. 38,570,804
Net change in unrealized appreciation.......................................................... (6,517,638)
-----------
NET GAIN.................................................................................. 32,053,166
-----------
NET INCREASE................................................................................... $25,900,105
-----------
-----------
</TABLE>
- ---------------------
* Class A, Class C and Class D shares were issued July 28, 1997.
SEE NOTES TO FINANCIAL STATEMENTS
56
<PAGE>
DEAN WITTER CAPITAL APPRECIATION FUND
FINANCIAL STATEMENTS, continued
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
FOR THE YEAR FOR THE YEAR
ENDED ENDED
NOVEMBER 30, NOVEMBER 30,
1997* 1996
- -----------------------------------------------------------------------------------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
OPERATIONS:
Net investment loss..................................... $ (6,153,061) $ (3,677,495)
Net realized gain (loss)................................ 38,570,804 (16,624,523)
Net change in unrealized appreciation................... (6,517,638) 48,698,318
-------------- --------------
NET INCREASE....................................... 25,900,105 28,396,300
Net increase from transactions in shares of beneficial
interest.............................................. 30,542,778 180,404,150
-------------- --------------
NET INCREASE....................................... 56,442,883 208,800,450
NET ASSETS:
Beginning of period..................................... 310,808,981 102,008,531
-------------- --------------
END OF PERIOD...................................... $ 367,251,864 $ 310,808,981
-------------- --------------
-------------- --------------
</TABLE>
- ---------------------
* Class A, Class C and Class D shares were issued July 28, 1997.
SEE NOTES TO FINANCIAL STATEMENTS
57
<PAGE>
DEAN WITTER CAPITAL APPRECIATION FUND
NOTES TO FINANCIAL STATEMENTS November 30, 1997
1. ORGANIZATION AND ACCOUNTING POLICIES
Dean Witter Capital Appreciation 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
long-term capital appreciation. The Fund was organized as a Massachusetts
business trust on July 31, 1995 and commenced operations on October 27, 1995. On
July 28, 1997, the Fund commenced offering three additional classes of shares,
with the then current shares designated as Class B shares.
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, 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 (in
cases where securities are traded on more than one exchange, the securities are
valued on the exchange designated as the primary market pursuant to procedures
adopted by the Trustees); (2) all other portfolio securities for which
over-the-counter market quotations are readily available are valued at the
latest 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 Dean Witter InterCapital Inc. (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 having a maturity date of
more than sixty
58
<PAGE>
DEAN WITTER CAPITAL APPRECIATION FUND
NOTES TO FINANCIAL STATEMENTS November 30, 1997, Continued
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
except for certain dividends on foreign securities which are recorded as soon as
the Fund is informed after 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. ORGANIZATIONAL EXPENSES -- The Investment Manager paid the organizational
expenses of the Fund in the amount of approximately $179,000 and was reimbursed
for the full amount thereof. Such expenses have been deferred and are being
amortized on the straight-line method over a period not to exceed five years
from the commencement of operations.
59
<PAGE>
DEAN WITTER CAPITAL APPRECIATION FUND
NOTES TO FINANCIAL STATEMENTS November 30, 1997, Continued
2. INVESTMENT MANAGEMENT AGREEMENT
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 0.75% to the net assets of the Fund determined as of the close of
each business day. Effective May 1, 1997, the Agreement was amended to reduce
the annual fee to 0.725% to the portion of daily net assets exceeding $500
million.
Under the terms of the Agreement, in addition to managing the Fund's
investments, the Investment Manager maintains certain of the Fund's books and
records and furnishes, at its own expense, office space, facilities, equipment,
clerical, bookkeeping and certain legal services and pays the salaries of all
personnel, including officers of the Fund who are employees of the Investment
Manager. The Investment Manager also bears the cost of telephone services, heat,
light, power and other utilities provided to the Fund.
3. PLAN OF DISTRIBUTION
Shares of the Fund are distributed by Dean Witter Distributors Inc. (the
"Distributor"), an affiliate of the Manager. The Fund has adopted a Plan of
Distribution (the "Plan") pursuant to Rule 12b-1 under the Act. The Plan
provides that the Fund will pay the Distributor a fee which is accrued daily and
paid monthly at the following annual rates: (i) Class A -- up to 0.25% of the
average daily net assets of Class A; (ii) Class B -- 1.0% of the lesser of: (a)
the average daily aggregate gross sales of the Class B shares since inception of
the Fund (not including reinvestment of dividend or capital gain distributions)
less the average net asset value of the Class B shares redeemed since the Fund's
inception upon which a contingent deferred sales charge has been imposed or
waived; or (b) the average daily net assets of Class B; and (iii) Class C -- up
to 1.0% of the average daily net assets of Class C. In the case of Class A
shares, amounts paid under the Plan are paid to the Distributor for services
provided. In the case of Class B and Class C shares, amounts paid under the Plan
are paid to the Distributor for services provided and the expenses borne by it
and others in the distribution of the shares of these Classes, including the
payment of commissions for sales of these Classes and incentive compensation to,
and expenses of, the account executives of Dean Witter Reynolds Inc. ("DWR"), an
affiliate of the Investment Manager and Distributor, and others who engage in or
support distribution of the shares or who service shareholder accounts,
including overhead and telephone expenses; printing and distribution of
prospectuses and reports used in connection with the offering of these shares to
other than current shareholders; and preparation, printing and distribution of
sales literature and advertising materials. In addition, the Distributor may
utilize fees
60
<PAGE>
DEAN WITTER CAPITAL APPRECIATION FUND
NOTES TO FINANCIAL STATEMENTS November 30, 1997, Continued
paid pursuant to the Plan, in the case of Class B shares, to compensate DWR and
other selected broker-dealers for their opportunity costs in advancing such
amounts, which compensation would be in the form of a carrying charge on any
unreimbursed expenses.
In the case of Class B shares, 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, including
carrying charges, totaled $12,299,293 at November 30, 1997.
In the case of Class A shares and Class C shares, expenses incurred pursuant to
the Plan in any calendar year in excess of 0.25% or 1.0% of the average daily
net assets of Class A or Class C, respectively, will not be reimbursed by the
Fund through payments in any subsequent year, except that expenses representing
a gross sales credit to account executives may be reimbursed in the subsequent
calendar year. For the period ended November 30, 1997, 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 period ended November 30,
1997, it received contingent deferred sales charges from certain redemptions of
the Fund's Class B shares and Class C shares of $983,855 and $653, respectively
and received $11,990 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 November 30, 1997 aggregated
$648,955,963 and $623,441,813, respectively.
For the year ended November 30, 1997, the Fund incurred brokerage commissions of
$29,900 with DWR for portfolio transactions executed on behalf of the fund.
For the period May 31, 1997 through November 30, 1997, the Fund incurred
brokerage commissions of $6,250 with Morgan Stanley & Co., Inc., an affiliate of
the Investment Manager since May 31, 1997, for portfolio transactions executed
on behalf of the Fund.
61
<PAGE>
DEAN WITTER CAPITAL APPRECIATION FUND
NOTES TO FINANCIAL STATEMENTS November 30, 1997, Continued
Dean Witter Trust FSB, an affiliate of the Investment Manager and Distributor,
is the Fund's transfer agent. At November 30, 1997, the Fund had transfer agent
fees and expenses payable of approximately $4,600.
5. SHARES OF BENEFICIAL INTEREST
Transactions in shares of beneficial interest were as follows:
<TABLE>
<CAPTION>
FOR THE YEAR FOR THE YEAR
ENDED ENDED
NOVEMBER 30, 1997 NOVEMBER 30, 1996
---------------------------- --------------------------
SHARES AMOUNT SHARES AMOUNT
----------- -------------- ----------- ------------
<S> <C> <C> <C> <C>
CLASS A SHARES*
Sold............................................................. 24,829 $ 380,181 -- --
Repurchased...................................................... (645) (9,645) -- --
----------- -------------- ----------- ------------
Net increase -- Class A.......................................... 24,184 370,536 -- --
----------- -------------- ----------- ------------
CLASS B SHARES
Sold............................................................. 15,086,938 211,255,509 20,783,480 $262,842,130
Repurchased...................................................... (13,313,433) (182,682,535) (6,542,161) (82,437,980)
----------- -------------- ----------- ------------
Net increase -- Class B.......................................... 1,773,505 28,572,974 14,241,319 180,404,150
----------- -------------- ----------- ------------
CLASS C SHARES*
Sold............................................................. 101,030 1,609,066 -- --
Repurchased...................................................... (10,471) (153,924) -- --
----------- -------------- ----------- ------------
Net increase -- Class C.......................................... 90,559 1,455,142 -- --
----------- -------------- ----------- ------------
CLASS D SHARES*
Sold............................................................. 9,511 144,126 -- --
----------- -------------- ----------- ------------
Net increase in Fund............................................. 1,897,759 $ 30,542,778 14,241,319 $180,404,150
----------- -------------- ----------- ------------
----------- -------------- ----------- ------------
</TABLE>
- ---------------------
* For the period July 28, 1997 (issue date) through November 30, 1997.
6. FEDERAL INCOME TAX STATUS
During the year ended November 30, 1997, the Fund utilized its net capital loss
carryover of approximately $15,684,000.
As of November 30, 1997, the Fund had temporary book/tax differences
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, paid-in-capital was
charged $6,136,407, accumulated undistributed net realized gain was charged
$16,654 and net investment loss was credited $6,153,061.
62
<PAGE>
DEAN WITTER CAPITAL APPRECIATION FUND
FINANCIAL HIGHLIGHTS
Selected ratios and per share data for a share of beneficial interest
outstanding throughout each period:
<TABLE>
<CAPTION>
FOR THE
PERIOD
OCTOBER 27,
FOR THE YEAR FOR THE YEAR 1995*
ENDED ENDED THROUGH
NOVEMBER 30, NOVEMBER 30, NOVEMBER 30,
1997**++ 1996 1995
- -----------------------------------------------------------------------------------
<S> <C> <C> <C>
CLASS B SHARES
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period.... $ 12.99 $ 10.53 $ 10.00
------ ------ ------
Net investment loss..................... (0.24) (0.15) (0.01)
Net realized and unrealized gain........ 1.47 2.61 0.54
------ ------ ------
Total from investment operations........ 1.23 2.46 0.53
------ ------ ------
Net asset value, end of period.......... $ 14.22 $ 12.99 $ 10.53
------ ------ ------
------ ------ ------
TOTAL INVESTMENT RETURN+................ 9.47% 23.36% 5.30%(1)
RATIOS TO AVERAGE NET ASSETS:
Expenses................................ 2.00% 2.00% 2.87%(2)
Net investment loss..................... (1.79)% (1.72)% (0.79)%(2)
SUPPLEMENTAL DATA:
Net assets, end of period, in
thousands.............................. $365,484 $310,809 $102,009
Portfolio turnover rate................. 184% 108% 7%(1)
Average commission rate paid............ $0.0570 $0.0570 --
</TABLE>
- ---------------------
* Commencement of operations.
** Prior to July 28, 1997, the Fund issued one class of shares. All shares of
the Fund held prior to that date have been designated Class B shares.
++ 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.
SEE NOTES TO FINANCIAL STATEMENTS
63
<PAGE>
DEAN WITTER CAPITAL APPRECIATION FUND
FINANCIAL HIGHLIGHTS, continued
<TABLE>
<CAPTION>
FOR THE PERIOD
JULY 28, 1997 *
THROUGH
NOVEMBER 30,
1997++
- ----------------------------------------------------------------------------------------
<S> <C>
CLASS A SHARES
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period.................................. $ 14.34
------
Net investment loss................................................... (0.06)
Net realized and unrealized loss...................................... (0.02)
------
Total from investment operations...................................... (0.08)
------
Net asset value, end of period........................................ $ 14.26
------
------
TOTAL INVESTMENT RETURN+.............................................. (0.56)%(1)
RATIOS TO AVERAGE NET ASSETS:
Expenses.............................................................. 1.27%(2)
Net investment loss................................................... (1.08)%(2)
SUPPLEMENTAL DATA:
Net assets, end of period, in thousands............................... $345
Portfolio turnover rate............................................... 184%(1)
Average commission rate paid.......................................... $0.0570
</TABLE>
<TABLE>
<S> <C>
CLASS C SHARES
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period.................................. $ 14.34
------
Net investment loss................................................... (0.09)
Net realized and unrealized loss...................................... (0.03)
------
Total from investment operations...................................... (0.12)
------
Net asset value, end of period........................................ $ 14.22
------
------
TOTAL INVESTMENT RETURN+.............................................. (0.84)%(1)
RATIOS TO AVERAGE NET ASSETS:
Expenses.............................................................. 2.03%(2)
Net investment loss................................................... (1.82)%(2)
SUPPLEMENTAL DATA:
Net assets, end of period, in thousands............................... $1,288
Portfolio turnover rate............................................... 184%(1)
Average commission rate paid.......................................... $0.0570
</TABLE>
- ---------------------
* The date shares were first issued.
++ 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.
SEE NOTES TO FINANCIAL STATEMENTS
64
<PAGE>
DEAN WITTER CAPITAL APPRECIATION FUND
FINANCIAL HIGHLIGHTS, continued
<TABLE>
<CAPTION>
FOR THE PERIOD
JULY 28, 1997*
THROUGH
NOVEMBER 30,
1997++
- ----------------------------------------------------------------------------------------
<S> <C>
CLASS D SHARES
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period.................................. $ 14.34
------
Net investment loss................................................... (0.04)
Net realized and unrealized loss...................................... (0.03)
------
Total from investment operations...................................... (0.07)
------
Net asset value, end of period........................................ $ 14.27
------
------
TOTAL INVESTMENT RETURN+.............................................. (0.49)%(1)
RATIOS TO AVERAGE NET ASSETS:
Expenses.............................................................. 1.01%(2)
Net investment loss................................................... (0.82)%(2)
SUPPLEMENTAL DATA:
Net assets, end of period, in thousands............................... $136
Portfolio turnover rate............................................... 184%(1)
Average commission rate paid.......................................... $0.0570
</TABLE>
- ---------------------
* The date shares were first issued.
++ 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.
SEE NOTES TO FINANCIAL STATEMENTS
65
<PAGE>
DEAN WITTER CAPITAL APPRECIATION FUND
REPORT OF INDEPENDENT ACCOUNTANTS
TO THE SHAREHOLDERS AND TRUSTEES
OF DEAN WITTER CAPITAL APPRECIATION 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 Dean Witter Capital Appreciation
Fund (the "Fund") at November 30, 1997, the results of its operations for the
year then ended, the changes in its net assets for each of the two years in the
period then ended and the financial highlights for each of the periods
presented, in conformity with generally accepted accounting principles. These
financial statements and financial highlights (hereafter referred to as
"financial statements") are the responsibility of the Fund's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these financial statements in accordance
with generally accepted auditing standards which require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audits, which included confirmation of securities at
November 30, 1997 by correspondence with the custodian and brokers and the
application of alternative auditing procedures where confirmations from brokers
were not received, provide a reasonable basis for the opinion expressed above.
PRICE WATERHOUSE LLP
1177 Avenue of the Americas
New York, New York 10036
January 14, 1998
66
<PAGE>
MORGAN STANLEY DEAN WITTER AMERICAN VALUE FUND
PART C
OTHER INFORMATION
ITEM 15. INDEMNIFICATION
The response to this item is incorporated herein by reference to Exhibits
1 and 2 under Item 16 below and by reference to Item 27 of, Post-Effective
Amendment No. 22 to Registrant's Registration Statement on Form N-1A, dated May
1, 1998, which was filed electronically pursuant to Regulation S-T on May 1,
1998 ("Post-Effective Amendment No. 22") as an amendment to Registrant's
Registration Statement on Form N-1A (File Nos. 811-2978 and 2-66269) (the
"Registration Statement").
ITEM 16. EXHIBITS
(1) Declaration of Trust dated April 6, 1987 ("Declaration of Trust")
(incorporated herein by reference to Exhibit 1 of Post-Effective Amendment
No. 19); Amendment Establishing and Designating Additional Classes of
Shares to Declaration of Trust (incorporated herein by reference to
Exhibit 1 to Post-Effective Amendment No. 21)
(2) Amended and Restated By-Laws of Registrant dated as of October 23, 1997
(incorporated herein by reference to Exhibit 2 of Post-Effective Amendment
No. 22)
(3) Not Applicable
(4) Copy of Agreement and Plan of Reorganization (filed herewith as Exhibit A
to the Proxy Statement and Prospectus)
(5) Not Applicable
(6) Investment Management Agreement (incorporated herein by reference to
Exhibit 5 to Post-Effective Amendment No. 22)
(7) (a) Distribution Agreement between Registrant and Dean Witter Distributors
Inc. (incorporated herein by reference to Exhibit 6(a) to
Post-Effective Amendment No. 21)
(b) Multiple Class Distribution Agreement between Registrant and Dean Witter
Distributors, Inc. (incorporated herein by reference to Exhibit 6(b) of
Post-Effective Amendment No. 21)
(c) Form of Selected Dealer Agreement (incorporated herein by reference to
Exhibit 6 to Post-Effective Amendment No. 19)
(8) Not Applicable
(9) (a) Custody Agreement dated September 20, 1991 (incorporated herein by
reference to Exhibit 8 to Post-Effective Amendment No. 19)
(b) Amended and Restated Transfer Agency and Services Agreement between
Registrant and Dean Witter Trust FSB (incorporated herein by reference
to Exhibit 8 of Post-Effective Amendment No. 22)
(10)(a) Amended and Restated Plan of Distribution pursuant to Rule 12b-1,
dated July 28, 1997 (incorporated herein by reference to Exhibit 15 to
Post-Effective Amendment No. 21)
C-1
<PAGE>
(b) Dean Witter Funds Multiple Class Plan pursuant to Rule 18f-3
(incorporated herein by reference to Exhibit 18 to Post-Effective
Amendment No. 21)
(11) (a) Opinion and consent of Gordon Altman Butowsky Weitzen Shalov & Wein
(b) Opinion and consent of Lane Altman & Owens
(12) Opinion and consent of Gordon Altman Butowsky Weitzen Shalov & Wein
regarding tax matters
(13) Form of Services Agreement between Morgan Stanley Dean Witter Advisors
Inc. and Morgan Stanley Dean Witter Services Company Inc. (incorporated
herein by reference to Exhibit 9 to Post-Effective Amendment No. 21)
(14) Consent of Independent Accountants
(15) Not Applicable
(16) Powers of Attorney
(17) (a) Registrant's Rule 24f-2 Notice pursuant to Rule 24f-2 under the
Investment Company Act of 1940, for its fiscal year ended December 31,
1997 (incorporated herein by reference to Form 24f-2 filed with the
Securities and Exchange Commission on March 2, 1998)
(b) Form of Proxy
ITEM 17. UNDERTAKINGS
1. The undersigned Registrant agrees that prior to any public reoffering
of the securities registered through the use of the prospectus which is a part
of this registration statement on Form N-14 by any person or party who is
deemed to be an underwriter within the meaning of Rule 145(c) of the Securities
Act of 1933, the reoffering prospectus will contain the information called for
by the applicable registration form for reofferings by persons who may be
deemed underwriters, in addition to the information called for by the other
items of the applicable form.
2. The undersigned Registrant agrees that every prospectus that is filed
under paragraph (1) above will be filed as a part of an amendment to this
registration statement on Form N-14 and will not be used until the amendment is
effective, and that, in determining any liability under the Securities Act of
1933, each post-effective amendment shall be deemed to be a new registration
statement for the securities offered therein, and the offering of the
securities at that time shall be deemed to be the initial bona fide offering of
them.
C-2
<PAGE>
SIGNATURES
As required by the Securities Act of 1933, this registration statement has
been signed on behalf of the registrant, in the City of New York and State of
New York, on the 28th day of October 1998.
MORGAN STANLEY DEAN WITTER AMERICAN VALUE FUND
By: /s/ Barry Fink
..........................................
Barry Fink
Vice President and Secretary
As required by the Securities Act of 1933, this registration statement has
been signed by the following persons in the capacities and on the dates
indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ------------------------------ ------------------------------------- -----------------
<S> <C> <C>
1. Principal Executive Officer
President, Chief Executive Officer, October 28, 1998
/s/ Charles A. Fiumefreddo
........................... Trustee and Chairman
2. Principal Financial Officer
/s/ Thomas F. Caloia
...........................
Treasurer and Principal October 28, 1998
Accounting Officer
3. Majority of Trustees
/s/ Michael Bozic
........................... October 28, 1998
Trustee
/s/ Edwin J. Garn Trustee October 28, 1998
...........................
/s/ John R. Haire Trustee October 28, 1998
...........................
/s/ Wayne E. Hedien Trustee October 28, 1998
...........................
/s/ Manuel H. Johnson Trustee October 28, 1998
...........................
/s/ Michael E. Nugent Trustee October 28, 1998
...........................
/s/ John L. Schroeder Trustee October 28, 1998
...........................
/s/ Philip J. Purcell Trustee October 28, 1998
...........................
</TABLE>
C-3
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT PAGE
NUMBER EXHIBIT NUMBER
- --------- ------------------------------------------------------------------------ -------
<S> <C> <C>
(11) (a) Opinion and consent of Gordon Altman Butowsky Weitzen Shalov & Wein
(b) Opinion and consent of Lane Altman & Owens
(12) Opinion and consent of Gordon Altman Butowsky Weitzen Shalov & Wein
regarding tax matters
(14) Consent of Independent Accountants
(16) Powers of Attorney
(17) (b) Form of Proxy
</TABLE>
<PAGE>
[LETTERHEAD OF GORDON ALTMAN BUTOWSKY WEITZEN SHALOV & WEIN]
November 2, 1998
Morgan Stanley Dean Witter American Value Fund
Two World Trade Center
New York, New York 10048
Ladies and Gentlemen:
This opinion is being furnished to Morgan Stanley Dean Witter
American Value Fund, a Massachusetts business trust (the "Trust"), in
connection with the Registration Statement on Form N-14 (the "Registration
Statement") under the Securities Act of 1933, as amended (the "1933 Act"), to
be filed by the Trust in connection with the acquisition by the Trust of
substantially all the assets of Morgan Stanley Dean Witter Capital Appreciation
Fund, a Massachusetts business trust ("Capital Appreciation"), in exchange for
shares of beneficial interest, par value $.01, of the Trust ("Shares") and the
assumption by the Trust of certain stated liabilities of Capital Appreciation
pursuant to an Agreement and Plan of Reorganization dated as of October 28,
1998 between the Trust and Capital Appreciation (the "Reorganization
Agreement"). We have examined such statutes, regulations, corporate records and
other documents and reviewed such questions of law as we deemed necessary or
appropriate for the purposes of this opinion.
As to matters of Massachusetts law contained in this opinion,
we have relied upon the opinion of Lane Altman & Owens LLP, dated November 2,
1998.
Based upon the foregoing, we are of the opinion that the
Shares when issued, as described in the Reorganization Agreement, will be duly
authorized and, assuming receipt of the consideration to be paid therefor, upon
delivery as provided in the Reorganization Agreement, will be legally issued,
fully paid and non-assessable (except for the potential liability of
shareholders described in the Trust's Prospectus dated May 1, 1998, As revised
August 21, 1998, under the caption "Additional Information").
We hereby consent to the filing of this opinion as an exhibit
to the Registration Statement and to the reference to us under the caption
"Legal Matters" in the Prospectus forming a part of the Registration Statement.
We do not thereby admit that we are within the category of persons whose
consent is required under Section 7 of the 1933 Act or the rules and
regulations of the Securities and Exchange Commission thereunder.
Very truly yours,
/s/ Gordon Altman Butowsky
Weitzen Shalov & Wein
----------------------
Gordon Altman Butowsky
Weitzen Shalov & Wein
<PAGE>
[LANE ALTMAN & OWENS LLP LETTERHEAD]
November 2, 1998
Gordon Altman Butowsky
Weitzen Shalov & Wein
114 West 47th Street
New York, NY 10036
Dear Sirs:
We understand that the trustees of Morgan Stanley Dean Witter American
Value Fund, a Massachusetts business trust (the "Trust"), intend, on or about
November 2, 1998, to cause to be filed on behalf of the Trust a Registration
Statement on Form N-14 (the "Registration Statement") in connection with the
acquisition (the "Acquisition") by the Trust of substantially all the assets of
Morgan Stanley Dean Witter Capital Appreciation Fund ("Capital Appreciation"),
in exchange for shares of beneficial interest of the Trust (the "Shares"), and
the assumption by the Trust of certain stated liabilities of Capital
Appreciation pursuant to an Agreement and Plan of Reorganization dated as of
October 28, 1998 between the Trust and Capital Appreciation (the "Agreement").
We further understand that the Shares will be issued pursuant to the Agreement.
You have requested that we act as special counsel to the Trust with
respect to the laws of the Commonwealth of Massachusetts on certain specified
matters, and in such capacity we are furnishing you with this opinion. You have
not asked for, and we do not offer, an opinion on any other matter or
transaction related to the Trust, Capital Appreciation, the Acquisition, the
Agreement or any matter related thereto, except as specifically set forth
below.
The Trust is a business trust created under an Agreement and
Declaration of Trust finally executed, delivered and filed in Boston,
Massachusetts on April 6, 1987 (the "Trust Agreement"). The Trustees of the
Trust (as defined in the Trust Agreement) (the "Trustees") have the powers set
forth in the Trust Agreement, subject to the terms, provisions and conditions
provided therein.
In connection with our opinions delivered herein, we have examined the
following items some of which have been provided to us by, or on behalf of,
you: (i) a copy of the Agreement in the form to be executed by the Trust and
Capital Appreciation (ii) a copy of the Trust Agreement; (iii) a copy of the
Amended and Restated By-laws of the Trust effective as of
<PAGE>
Gordon Altman Butowsky
November 2, 1998
Page 2
October 23, 1997; (iv) a Certificate of Legal Existence for the Trust provided
by the Secretary of State of the Commonwealth of Massachusetts dated October
28, 1998; and (v) copies of the Registration Statement on Form N-14 to be filed
by the Trust and the Trust's current Prospectus and Statement of Additional
Information.
In rendering this opinion we have assumed, without independent
verification, (i) the due authority of all individuals signing in
representative capacities and the genuineness of signatures, (ii) the
authenticity, completeness and continued effectiveness of all documents or
copies furnished to us, (iii) that resolutions approving the Registration
Statement, the Acquisition and the Agreement have been duly adopted by the
Trustees, (iv) that no amendments, agreements, resolutions or actions have been
approved, executed or adopted which would limit, supersede or modify the items
described above, and (v) that the by-laws filed as an exhibit to the
Registration Statement have been duly adopted by the Trustees. We have also
examined such questions of law as we have concluded necessary or appropriate
for purposes of the opinions expressed below. Where documents are referred to
in resolutions approved by the Trustees, or in the Registration Statement, we
assume such documents are the same as in the most recent form provided to us,
whether as an exhibit to the Registration Statement, or otherwise. When any
opinion set forth below relates to the existence or standing of the Trust, such
opinion is based entirely upon and is limited by the items referred to above.
We understand that the foregoing assumptions, limitations and qualifications
are acceptable to you.
Based upon the foregoing, and with respect to Massachusetts law only
(except that no opinion is herein expressed with respect to compliance with the
Massachusetts Uniform Securities Act), to the extent that Massachusetts law may
be applicable, and without reference to the laws of any of the other several
states or of the United States of America, including State and Federal
securities laws, we are of the opinion that:
1. The Trust is a business trust with transferable shares, organized in
compliance with the requirements of The Commonwealth of Massachusetts, and the
Trust Agreement is legal and valid.
2. The Shares to be issued as described in the Registration Statement,
including any Exhibits thereto, have been duly authorized and, assuming receipt
of the consideration to be paid therefor, upon delivery as provided in the
Agreement, will be validly issued, fully paid and nonassessable (except for the
potential liability of shareholders described in the Trust's current Prospectus
under the caption "Additional Information").
We understand that you will rely on this opinion solely in connection
with your opinion to be filed with the Securities and Exchange Commission as an
Exhibit to the Registration
<PAGE>
Gordon Altman Butowsky
November 2, 1998
Page 3
Statement. We hereby consent to such use of this opinion and we also consent to
the filing of said opinion with the Securities and Exchange Commission. In so
consenting, we do not thereby admit to be within the category of persons whose
consent is required under Section 7 of the Securities Act of 1933, as amended,
or the rules and regulations of the Securities and Exchange Commission
thereunder.
Very truly yours,
/s/ LANE ALTMAN & OWENS LLP
-----------------------------
LANE ALTMAN & OWENS LLP
<PAGE>
[LETTERHEAD OF GORDON ALTMAN BUTOWSKY WEITZEN SHALOV & WEIN]
November 2, 1998
Morgan Stanley Dean Witter American Value Fund
Two World Trade Center
New York, New York 10048
Morgan Stanley Dean Witter Capital Appreciation Fund
Two World Trade Center
New York, New York 10048
Gentlemen:
You have requested our opinion as to the Federal income tax
consequences of the transaction (the "Reorganization") described below pursuant
to which (i) substantially all assets of Morgan Stanley Dean Witter Capital
Appreciation Fund, a Massachusetts business trust ("Capital Appreciation"),
will be combined with those of Morgan Stanley Dean Witter American Value Fund,
a Massachusetts business trust ("American Value"), in exchange for shares of
American Value ("American Value Shares"), and the assumption by American Value
of certain liabilities of Capital Appreciation (the "Liabilities"); (ii)
Capital Appreciation will be liquidated; and (iii) American Value Shares will
be distributed to the holders ("Capital Appreciation Shareholders") of shares
in Capital Appreciation ("Capital Appreciation Shares").
We have examined and are familiar with such documents,
records and other instruments as we have deemed appropriate for purposes of
this opinion letter, including the Registration Statement filed with the
Securities and Exchange Commission under the Securities Act of 1933 on Form
N-14, relating to American Value Shares (the "Registration Statement") which
includes, as a part thereof, the proxy statement of Capital Appreciation (the
"Capital Appreciation Proxy"), which will be used to solicit proxies of Capital
Appreciation Shareholders in connection with the Special Meeting of Capital
Appreciation Shareholders and the Agreement and Plan of Reorganization by and
between American Value and Capital Appreciation (the "Plan").
In rendering this opinion, we have assumed that the
Reorganization will be carried out pursuant to the terms of the Plan, that
factual statements and information contained in the
<PAGE>
November 2, 1998
Page 2
Registration Statement, the Capital Appreciation Proxy and other documents,
records and instruments supplied to us are correct and that there will be no
material change with respect to such facts or information prior to the time of
the Reorganization. In rendering our opinion, we have also relied on the
representations and facts discussed below which have been provided to us by
Morgan Stanley Dean Witter Advisors Inc. ("MSDW Advisors), American Value and
Capital Appreciation, and we have assumed that such representations and facts
will remain correct at the time of the Reorganization.
FACTS
American Value is an open-end diversified management
investment company engaged in the continuous offering of its shares to the
public. Since its inception, American Value has conducted its affairs so as to
qualify, and has elected to be taxed, as a regulated investment company under
Section 851 of the Internal Revenue Code of 1986, as amended (the "Code").
Capital Appreciation is an open-end diversified management
investment company engaged in the continuous offering of its shares to the
public. Since its inception, Capital Appreciation has conducted its affairs so
as to qualify, and has elected to be taxed, as a regulated investment company
under Section 851 of the Code.
The Board of Trustees of American Value and the Board of
Trustees of Capital Appreciation have each determined, for valid business
reasons, that it is advisable to combine the assets of American Value and
Capital Appreciation into one fund.
In view of the above, the Board of Trustees of Capital
Appreciation adopted the Plan, subject to, among other things, approval by
Capital Appreciation Shareholders.
Pursuant to the Plan, Capital Appreciation will transfer all
of its assets to American Value in exchange for American Value Shares
(including fractional American Value Shares) and the assumption by American
Value of the Liabilities. Immediately thereafter, Capital Appreciation will
distribute American Value Shares to Capital Appreciation Shareholders in
exchange for and in cancellation of their Capital Appreciation Shares and in
complete liquidation of Capital Appreciation.
<PAGE>
November 2, 1998
Page 3
Each of the following representations, among other
representations, has been made to us in connection with the Reorganization by
MSDW Advisors, by Capital Appreciation and by American Value.
(1) To the best of the knowledge of the management of MSDW
Advisors, Capital Appreciation, American Value, and their affiliates, there is
no plan or intention on the part of Capital Appreciation Shareholders to
redeem, sell, exchange or otherwise dispose of a number of American Value
Shares that would reduce Capital Appreciation Shareholders' ownership of
American Value Shares to a number of American Value Shares having a value, as
of the date of the Reorganization, of less than fifty percent of the value of
all of the formerly outstanding Capital Appreciation Shares as of such date;
(2) American Value has no plan or intention to reacquire any
of the American Value Shares to be issued pursuant to the Reorganization except
to the extent necessary to comply with its legal obligation to redeem its own
shares;
(3) The Liabilities to be assumed by or transferred to
American Value were incurred by Capital Appreciation in the ordinary course of
business and are associated with the assets being transferred to American
Value;
(4) The amount of the Liabilities will not exceed the
aggregate adjusted basis of Capital Appreciation for its assets transferred to
American Value;
(5) American Value has no plan or intention to sell or
otherwise dispose of more than fifty percent of the assets of Capital
Appreciation acquired in the Reorganization, except for dispositions made in
the ordinary course of business;
(6) There is no indebtedness between Capital Appreciation and
American Value that was issued, acquired or will be settled at a discount;
(7) Capital Appreciation has been a regulated investment
company within the meaning of Section 851 of the Code since the date of its
organization through the end of its last complete taxable year and will qualify
as a regulated investment
<PAGE>
November 2, 1998
Page 4
company for its taxable year ending on the date of the Reorganization;
(8) American Value has been a regulated investment company
within the meaning of Section 851 of the Code since the date of its
organization through the date hereof and will qualify as a regulated investment
company for its taxable year ending on December 31, 1999;
(9) Capital Appreciation will have no accumulated earnings
and profits as of the close of its taxable year ending on the date of the
Reorganization.
OPINION
Based on the Code, Treasury Regulations issued thereunder,
Internal Revenue Service Rulings and the relevant case law, as of the date
hereof, and on the facts, representations and assumptions set forth above, and
the documents, records and other instruments we have reviewed, it is our
opinion that the Federal income tax consequences of the Reorganization to
American Value, Capital Appreciation and the Capital Appreciation Shareholders
will be as follows:
(1) The transfer of substantially all of Capital
Appreciation's assets in exchange for American Value Shares and the assumption
by American Value of Liabilities of Capital Appreciation, followed by the
distribution by Capital Appreciation of American Value Shares to the Capital
Appreciation Shareholders in exchange for their Capital Appreciation Shares,
will constitute a "reorganization" within the meaning of Section 368(a)(1)(C)
of the Code, and Capital Appreciation and American Value will each be a "party
to a reorganization" within the meaning of Section 368(b) of the Code;
(2) No gain or loss will be recognized by American Value upon
the receipt of the assets of Capital Appreciation solely in exchange for
American Value Shares and the assumption of the Liabilities by American Value;
(3) No gain or loss will be recognized by Capital
Appreciation upon the transfer of the assets of Capital Appreciation to
American Value, in exchange for American Value Shares and the assumption of the
Liabilities by American Value,
<PAGE>
November 2, 1998
Page 5
or upon the distribution of American Value Shares to Capital Appreciation
Shareholders in exchange for their Capital Appreciation Shares as provided in
the Plan;
(4) No gain or loss will be recognized by Capital
Appreciation Shareholders upon the exchange of their Capital Appreciation
Shares for American Value Shares;
(5) The aggregate tax basis for American Value Shares
received by each Capital Appreciation Shareholder pursuant to the
Reorganization will be the same as the aggregate tax basis of the Capital
Appreciation Shares held by each such Capital Appreciation Shareholder
immediately prior to the Reorganization;
(6) The holding period of American Value Shares to be
received by each Capital Appreciation Shareholder will include the period
during which the Capital Appreciation Shares surrendered in exchange therefor
were held (provided such Capital Appreciation Shares were held as capital
assets on the date of the Reorganization);
(7) The tax basis of the assets of Capital Appreciation
acquired by American Value will be the same as the tax basis of such assets to
Capital Appreciation immediately prior to the Reorganization; and
(8) The holding period of the assets of Capital Appreciation
in the hands of American Value will include the period during which those
assets were held by Capital Appreciation.
We are not expressing an opinion as to any aspect of the
Reorganization other than those opinions expressly stated above.
As noted above, this opinion is based upon our analysis of
the Code, Treasury Regulations issued thereunder, Internal Revenue Service
Rulings and case law which we deem relevant as of the date hereof. No
assurances can be given that there will not be a change in the existing law or
that the Internal Revenue Service will not alter its present views, either
prospectively or retroactively, or adopt new views with regard to any of the
matters upon which we are rendering this opinion, nor can any assurances be
given that the Internal Revenue Service will not
<PAGE>
November 2, 1998
Page 6
audit or question the treatment accorded to the Reorganization on the Federal
income tax returns of American Value, Capital Appreciation or the Capital
Appreciation Shareholders.
We hereby consent to the filing of this opinion as an exhibit
to the Registration Statement and to the use of our name and any reference to
our firm in the Registration Statement and the Capital Appreciation Proxy
constituting a part thereof.
Very truly yours,
/s/ Gordon Altman Butowsky
Weitzen Shalov & Wein
----------------------
Gordon Altman Butowsky
Weitzen Shalov & Wein
<PAGE>
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Proxy Statement and
Prospectus and the Statement of Additional Information constituting parts of
this registration statement on Form N-14 (the "Registration Statement") of our
report dated February 6, 1998, relating to the December 31, 1997 financial
statements and financial highlights of Dean Witter American Value Fund (the
"Fund"), which is also incorporated by reference into the Registration
Statement and to the reference to us under the heading "Financial Statements
and Experts" in such Proxy Statement and Prospectus. We also consent to the
references to us under the headings "Independent Accountants" and "Experts" in
the Fund's Statement of Additional Information dated May 1, 1998 and to the
reference to us under the heading "Financial Highlights" in the Fund's
Prospectus dated May 1, 1998, which Statement of Additional Information and
Prospectus have been incorporated by reference into this Registration
Statement. We also consent to the incorporation by reference in the Proxy
Statement and Prospectus of our report dated January 14, 1998 relating to the
November 30, 1997 financial statements and financial highlights of Dean Witter
Capital Appreciation Fund, which appears in that fund's Statement of Additional
Information dated January 29, 1998 which is incorporated by reference into this
Registration Statement and to the incorporation by reference of our report into
that fund's Prospectus dated January 29, 1998 which is incorporated by
reference into this Registration Statement. We also consent to the references
to us under the headings "Independent Accountants" and "Experts" in that fund's
Statement of Additional Information and to the reference to us under the
heading "Financial Highlights" in that fund's Prospectus.
/s/ PricewaterhouseCoopers LLP
- ------------------------------
PricewaterhouseCoopers LLP
1177 Avenue of the Americas
New York, New York 10036
November 4, 1998
<PAGE>
POWER OF ATTORNEY
Know All Men by These Presents, that each person whose signature appears
below constitutes and appoints David M. Butowsky, Stuart M. Strauss and Ronald
M. Feiman and each and any one of them, his true and lawful attorneys-in-fact
and agents, with full power of substitution and resubstitution, for him and in
his name, place and stead, in any and all capacities, to sign any or all
amendments (including post-effective amendments) to the Registration Statement
on Form N-14 of Morgan Stanley Dean Witter American Value Fund, and to file the
same, with all exhibits thereto, and other documents in connection therewith,
with the Securities and Exchange Commission, granting unto said
attorneys-in-fact and agents, and each of them, full power and authority to do
and perform each and every act and thing requisite and necessary to be done in
and about the premises, as fully to all intents and purposes as he might or
could do in person, hereby ratifying and confirming all that said
attorneys-in-fact and agents, or any of them, or their or his substitutes, may
lawfully do or cause to be done by virtue hereof.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ---------------------------------- --------- -----------------
<S> <C> <C>
/s/ MICHAEL BOZIC Trustee October 28, 1998
-------------------------------
/s/ EDWIN J. GARN Trustee October 28, 1998
-------------------------------
/s/ JOHN R. HAIRE Trustee October 28, 1998
-------------------------------
/s/ MANUEL H. JOHNSON Trustee October 28, 1998
-------------------------------
/s/ MICHAEL E. NUGENT Trustee October 28, 1998
-------------------------------
/s/ JOHN L. SCHROEDER Trustee October 28, 1998
-------------------------------
/s/ WAYNE E. HEDIEN Trustee October 28, 1998
-------------------------------
</TABLE>
<PAGE>
POWER OF ATTORNEY
Know All Men by These Presents, that each person whose signature appears
below constitutes and appoints Barry Fink and Marilyn K. Cranney and each and
any one of them, his true and lawful attorneys-in-fact and agents, with full
power of substitution and resubstitution, for him and in his name, place and
stead, in any and all capacities, to sign any or all amendments (including
post-effective amendments) to the Registration Statement on Form N-14 of Morgan
Stanely Dean Witter American Value Fund, and to file the same, with all
exhibits thereto, and other documents in connection therewith, with the
Securities and Exchange Commission, granting unto said attorneys-in-fact and
agents, and each of them, full power and authority to do and perform each and
every act and thing requisite and necessary to be done in and about the
premises, as fully to all intents and purposes as he might or could do in
person, hereby ratifying and confirming all that said attorneys-in-fact and
agents, or any of them, or their or his substitutes, may lawfully do or cause
to be done by virtue hereof.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ---------------------------------- --------- -----------------
<S> <C> <C>
/s/ CHARLES A. FIUMEFREDDO Trustee October 28, 1998
-------------------------------
/s/ PHILIP J. PURCELL Trustee October 28, 1998
-------------------------------
</TABLE>
<PAGE>
MORGAN STANLEY DEAN WITTER CAPITAL APPRECIATION FUND
PROXY FOR SPECIAL MEETING OF SHAREHOLDERS
TO BE HELD FEBRUARY 24, 1999
The undersigned shareholder of Morgan Stanley Dean Witter Capital
Appreciation Fund does hereby appoint BARRY FINK, ROBERT M. SCANLAN and JOSEPH
MCALINDEN and each of them, as attorneys-in-fact and proxies of the
undersigned, each with the full power of substitution, to attend the Special
Meeting of Shareholders of Morgan Stanley Dean Witter Capital Appreciation Fund
to held on February 24, 1999, in Conference Room A, Forty-Fourth Floor, Two
World Trade Center, New York, New York at 10:00 A.M., New York time, and at all
adjournments thereof and to vote the shares held in the name of the undersigned
on the record date for said meeting for the Proposal specified on the reverse
side hereof. Said attorneys-in-fact shall vote in accordance with their best
judgment as to any other matter.
(Continued on reverse side)
THIS PROXY WHEN PROPERLY EXECUTED WILL BE VOTED IN THE MANNER DIRECTED HEREIN
BY THE UNDERSIGNED SHAREHOLDER. IF NO DIRECTION IS MADE, THIS PROXY WILL BE
VOTED "FOR" THE PROPOSAL SET FORTH ON THE REVERSE HEREOF AND AS RECOMMENDED BY
THE BOARD OF TRUSTEES.
IMPORTANT--THIS PROXY MUST BE SIGNED AND DATED ON THE REVERSE SIDE.
<PAGE>
PLEASE MARK BOXES
[X] IN BLACK OR BLUE INK
The Proposal:
Approval of the Agreement and Plan of FOR AGAINST ABSTAIN
Reorganization, dates as of October 28, 1998,
pursuant to which substantially all of the assets [ ] [ ] [ ]
of Morgan Stanley Dean Witter Capital Appreciation Fund would be combined with
those of Morgan Stanley Dean Witter American Value Fund and shareholders of
Morgan Stanley Dean Witter Capital Appreciation Fund would become shareholders
of Morgan Stanley Dean Witter American Value Fund receiving shares in Morgan
Stanley Dean Witter American Value Fund with a value equal to the value of
their holdings in Morgan Stanley Dean Witter Capital Appreciation Fund.
Please sign personally. If the shares are registered in more than one name,
each joint owner or each fiduciary
should sign personally. Only authorized officers should sign for corporations.
Date_____________________
Please make sure to sign and date this Proxy using black or blue ink.
---------------------------------------
---------------------------------------
Shareholder sign in the box above
---------------------------------------
---------------------------------------
Co-Owner (if any) sign in the box above
- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -
- - PLEASE DETACH AT PERFORATION - -
MORGAN STANLEY DEAN WITTER
CAPITAL APPRECIATION FUND
IMPORTANT
PLEASE SEND IN YOUR PROXY.........TODAY!
YOU ARE URGED TO DATE AND SIGN THE ATTACHED PROXY AND RETURN IT PROMPTLY IN
THE ENCLOSED ENVELOPE. THIS WILL HELP SAVE THE EXPENSE OF FOLLOW-UP LETTERS TO
SHAREHOLDERS WHO HAVE NOT RESPONDED.
